A Permanent Income Version of the Relative Income Hypothesis
McGill University - Department of Economics
Ngo Van Long
McGill University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
CESifo Working Paper Series No. 2361
We propose an overlapping generations economy where households care about relative consumption, the difference between their consumption and the consumption of their reference group. An individual's consumption is driven by the comparison of his lifetime income and the lifetime income of his reference group; hence the paper offers a permanent income version of the Duesenberry's relative income hypothesis. Across households the saving ratio increases with income while aggregate saving is independent of the income distribution. Positional concerns lead agents to over-consume, over-work and under-save. We propose a simple tax schedule that induces the competitive economy to achieve the efficient allocation.
Number of Pages in PDF File: 32
Keywords: relative consumption, relative income hypothesis, permanent income
JEL Classification: H21working papers series
Date posted: July 30, 2008
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