The relative income hypothesis

Francisco Alvarez-Cuadrado () and Ngo Long

Journal of Economic Dynamics and Control, 2011, vol. 35, issue 9, 1489-1501

Abstract: Despite its theoretical dominance, the empirical case in favor of the permanent income hypothesis is weak. Contrary to one of its basic implications, a growing body of evidence suggests that rich households save a higher proportion of their permanent income than poor households. We propose an overlapping-generations economy where households care about relative consumption. As a result, an individual's consumption is driven by the comparison of his lifetime income and the lifetime income of his reference group; a permanent income version of Duesenberry's (1949) relative income hypothesis. Across households the savings rate increases with income while aggregate savings are independent of the income distribution.

Keywords: Interpersonal; comparisons; Relative; income; hypothesis; Permanent; income; hypothesis (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (50)

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Working Paper: The Relative Income Hypothesis (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:35:y:2011:i:9:p:1489-1501

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