A Permanent Income Version of the Relative Income Hypothesis

32 Pages Posted: 30 Jul 2008

See all articles by Francisco Alvarez-Cuadrado

Francisco Alvarez-Cuadrado

McGill University - Department of Economics

Ngo Van Long

McGill University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: July 2008

Abstract

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.

Keywords: relative consumption, relative income hypothesis, permanent income

JEL Classification: H21

Suggested Citation

Alvarez-Cuadrado, Francisco and Van Long, Ngo, A Permanent Income Version of the Relative Income Hypothesis (July 2008). CESifo Working Paper Series No. 2361, Available at SSRN: https://ssrn.com/abstract=1187572

Francisco Alvarez-Cuadrado

McGill University - Department of Economics ( email )

855 Sherbrooke Street West
Montreal, QC H3A 2T7
Canada

Ngo Van Long (Contact Author)

McGill University - Department of Economics ( email )

855 Sherbrooke Street West
Montreal, QC H3A 2T7
Canada
514-398-4850 (Phone)
514-398-4938 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
167
Abstract Views
1,543
rank
212,849
PlumX Metrics