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A Model of the Relative Income Hypothesis

Shane Sanders

The Journal of Economic Education, 2010, vol. 41, issue 3, 292-305

Abstract: James Duesenberry's (1949) relative income hypothesis holds substantial empirical credibility, as well as a rich set of implications. Although present in the pages of leading economics journals, the hypothesis has become all but foreign to the blackboards of economics classrooms. To help reintegrate the concept into the undergraduate economics curriculum, the author constructs a model of the relative income hypothesis to present a few of its important properties and implications. Negative spending externalities, the effect of public provision taxes on wasteful spending races, and the Pareto implications of universal income growth are illustrated within a two-good consumption space as a method of introducing this rich literature to a greater number of introductory and intermediate economics students.

Date: 2010
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DOI: 10.1080/00220485.2010.486733

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