Expenditure Cascades

34 Pages Posted: 12 Oct 2010  

Adam Seth Levine

Vanderbilt University

Robert H. Frank

Cornell University - Department of Economics

Oege Dijk

Center for Finance

Date Written: September 13, 2010

Abstract

Prevailing economic models of consumer behavior completely ignore the well-documented link between context and evaluation. We propose and test a theory that explicitly incorporates this link. Changes in one group’s spending shift the frame of reference that defines consumption standards for others just below them on the income scale, giving rise to expenditure cascades. Our model, a descendant of James Duesenberry’s relative income hypothesis, predicts the observed ways in which individual savings rates respond to changes in both own and others’ permanent income, as well as numerous other stylized fact patterns that are difficult to reconcile with prevailing models.

JEL Classification: D11, D12

Suggested Citation

Levine, Adam Seth and Frank, Robert H. and Dijk, Oege, Expenditure Cascades (September 13, 2010). Available at SSRN: https://ssrn.com/abstract=1690612 or http://dx.doi.org/10.2139/ssrn.1690612

Adam Seth Levine

Vanderbilt University ( email )

Nashville, TN 37240
United States

Robert Frank (Contact Author)

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States
607-255-8501 (Phone)
607-254-4590 (Fax)

Oege Dijk

Center for Finance ( email )

Box 640
Gothenburg, 403 50
Sweden

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