Income Distribution, Consumer Debt and Keeping up with the Joneses

Soon Ryoo and Yk Kim

Metroeconomica, 2014, vol. 65, issue 4, 585-618

Abstract: We extend Kaldor's theory of income distribution to include workers' debt accumulation and their motive to emulate rentiers' consumption. Our results show that (i) the interaction between income distribution and emulation can produce instability; (ii) instability is more likely when the workers' emulation motive is strong and bankers' lending decisions are highly accommodating; and (iii) a plausible assumption on the non-linearity of emulation behavior can generate a limit cycle. Our analysis provides an alternative perspective on the increase in household indebtedness for the decades before the recent crisis and the subsequent deleveraging process.

Date: 2014
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