Difference or Ratio: Implication of Status Preference on Stagnation

Yoshiyasu Ono and Katsunori Yamada

ISER Discussion Paper from Institute of Social and Economic Research, The University of Osaka

Abstract: We consider a dynamic macroeconomic model of households that regard relative affluence as social status. The measure of relative affluence can be the ratio to, or the difference from, the social average. The two specifications lead to quite different equilibrium consequences: under the ratio specification full employment is necessarily realized, whereas under the difference specification there is a case where a persistent shortage of aggregate demand arises. Furthermore, using data of an affluence comparison experiment we empirically find that the difference specification fits the data better than the ratio specification. Therefore, affluence comparison can be a cause of persistent stagnation.

Date: 2012-10, Revised 2014-01
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Journal Article: Difference or Ratio: Implications of Status Preference on Stagnation (2018)
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