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Consumption-Savings Decisions Under Upward-Looking Comparisons
Abstract
We demonstrate that upward-looking comparisons induce “keeping up with the richer Joneses”-behaviour. Using data from the German Socio-Economic Panel, we estimate the effect of reference consumption, defined as the consumption level of all households who are perceived to be richer, on household consumption. When controlling for own income as well as unobserved individual and local area heterogeneity, a one per cent increase in reference consumption leads households to raise own consumption by about 0.3 per cent. At the mean values of own and reference consumption this implies that a 100 euro increase in reference consumption leads to an increase in own consumption of approximately 18 euros. Our findings establish an important microeconomic link between changing income inequality and aggregate consumption.
... The result still holds if the distribution sample is defined by age, education, or region. In the robustness check, Drechsel-Grau and Schmid (2014) replace the reference consumption with consumption of the next-higher consumption class in one specification and consumption of all the higher classes except for the next-higher in another specification. The authors conclude that both the adjacent class and the top class matter for a household's consumption. ...
... when a household moves upwards to a higher class and the consumption of its reference, which is the consumption of all the classes higher than the household's class, also raises. Drechsel-Grau and Schmid (2014) control for this movement by interacting the change in reference consumption with a binary variable indicating whether the class of the household in question changes. Even though Drechsel-Grau and Schmid (2014) can solve the problems caused by reranking, there is a fundamental limitation on the approach of relative reference: it cannot tell us which class is comparing and which class they are comparing themselves with. ...
... Drechsel-Grau and Schmid (2014) control for this movement by interacting the change in reference consumption with a binary variable indicating whether the class of the household in question changes. Even though Drechsel-Grau and Schmid (2014) can solve the problems caused by reranking, there is a fundamental limitation on the approach of relative reference: it cannot tell us which class is comparing and which class they are comparing themselves with. Instead, I will do regressions for each class separately. ...
If everyone compares themselves with those who are ranked right above them in the income distribution, rising income concentration at the top may induce everyone below it to increase their expenditure despite limited income. Trickle-down consumption may bring financial distress to non-rich households and thus raise the probability of a financial crisis. However, if the geographic area of the distribution sample is big enough so that the households in one group do not have enough social interaction with those in another group, then the expenditure cascade hypothesis may not be able to apply. In this paper, I show that there is no evidence for the expenditure cascade hypothesis if the expenditure distribution is defined at the level of census divisions.
... In some literature, the Joneses are more likely to be macro. For example, the Joneses are the households at the top 20% of the state income distribution in Bertrand and Morse (2016) and the ten consumption classes of Germany in Drechsel- Grau and Schmid (2014). In other papers, we cannot tell if the Joneses are micro or macro because they are defined as a representative agent in a small region regardless of their social distance or the people who share certain characteristics with the household in question, regardless of their geographical distances. ...
... The result still holds if the distribution sample is defined by age, education, or region. In the robustness check, Drechsel-Grau and Schmid (2014) replace the reference consumption with consumption of the next-higher consumption class in one specification and consumption of all the higher classes except for the next-higher in another specification. The authors conclude that both the adjacent class and the top class matter for a household's consumption. ...
... Drechsel-Grau and Schmid (2014) control for this movement by interacting the change in reference consumption with a binary variable indicating whether the class of the household in question changes. Even though Drechsel-Grau and Schmid (2014) can solve the problems caused by reranking, there is a fundamental limitation on the approach of relative reference: it cannot tell us which class is comparing and which class they are comparing themselves with. Instead, I will do regressions for each class separately. ...
If everyone compares themselves with those who are ranked right above them in the income distribution, rising income concentration at the top may induce everyone below it to increase their expenditure despite limited income. Trickle-down consumption may bring financial distress to non-rich households and thus raise the probability of a financial crisis. However, if the geographic area of the distribution sample is big enough so that the households in one group do not have enough social interaction with those in another group, then the expenditure cascade hypothesis may not be able to apply. In this paper, I show that there is no evidence for the expenditure cascade hypothesis if the expenditure distribution is defined at the level of census divisions.
... The importance of interpersonal comparisons in consumption and income is well established for the microeconomic level. Among others, Bertrand and Morse (2016), Bricker et al. (2020) and Heffetz (2011) find significant effects of interpersonal comparisons for individual consumption in the US, Jinkins (2016) for the US and China, Quintana-Domeque and Wohlfart (2016) for the UK, Drechsel-Grau and Schmid (2014) for Germany and Alpizar et al. (2005) for Costa Rica. However, the choice of reference groups within these studies often lacks granularity, underlining the need for more plausible models of interaction in networks. ...
... Generally, positional concerns can be modelled both within an intertemporal maximisation framework with explicit expectation formation (Drechsel-Grau and Schmid, 2014) or building merely on current income without any expectations relating to future income streams (Frank et al., 2014). We choose the latter option for two reasons: Firstly, we aim to keep assumptions on individual behaviour as minimal as possible to preserve maximal generalisability. ...
The nexus between debt and inequality has attracted considerable scholarly attention in the wake of the global financial crisis. One prominent candidate to explain the striking co-evolution of income inequality and private debt in this period has been the theory of upward-looking consumption externalities leading to expenditure cascades. We propose a parsimonious model of upward-looking consumption at the micro level mediated by perception networks with empirically plausible topologies. This allows us to make sense of the ambiguous empirical literature on the relevance of this channel. Up to our knowledge, our approach is the first to make the reference group to which conspicuous consumption relates explicit. Our model, based purely on current income, replicates the major stylised facts regarding micro consumption behaviour and is thus observationally equivalent to the workhorse permanent income hypothesis, without facing its dual problem of `excess smoothness' and `excess sensitivity'. We also demonstrate that the network topology and segregation has a significant effect on consumption patterns which has so far been neglected.
... To the best of our knowledge, the extant literature has not considered the role of digital finance in trickle-down consumption behavior. This study's reference groups are located along the upper part of the household income distribution at the county level, unlike Bertrand and Morse (2016) and Drechsel-Grau and Schmid (2014), who examined distribution at the state level. By defining our reference groups, we make a more meticulous comparison of consumption between nonrich households and their wealthy benchmark counterparts. ...
... Household consumption behavior is usually associated with the consumption of the neighbors or some reference group, typically those with an average or higher consumption level in the target household's village, county, or state. This behavior has been referred to as "envy" by Varian (1974) and Alvarez-Cuadrado et al. (2016), "keeping up with the Joneses" by Gali (1994) and Maurer and Meier (2008), "keeping up with the richer Joneses" in Drechsel-Grau and Schmid (2014), "trickle-down consumption" in Bertrand and Morse (2016), and the relative income hypothesis in Frank et al. (2014). The consumption of the reference group could provide a reference point for other households as they make intertemporal consumption decisions. ...
... As shown in the breakdown of DGS, the technique of the first difference here turns to lower the beta hat slightly from raising it in the extreme simulation. Also, the technique of fixed Figure 11 Break down Drechsel- Grau and Schmid (2014) This figure compares the beta hats estimated by the different techniques embedded in the full specification of Drechsel-Grau and Schmid (2014) with its baseline at different weights of measurement error. The data is from the realistic simulation, described by equations (12) - (14). ...
... As shown in the breakdown of DGS, the technique of the first difference here turns to lower the beta hat slightly from raising it in the extreme simulation. Also, the technique of fixed Figure 11 Break down Drechsel- Grau and Schmid (2014) This figure compares the beta hats estimated by the different techniques embedded in the full specification of Drechsel-Grau and Schmid (2014) with its baseline at different weights of measurement error. The data is from the realistic simulation, described by equations (12) - (14). ...
Abstract: Consumption spillovers are difficult to estimate. Many tests in the literature argue that spillovers cause positive correlations between individual consumption levels and aggregate income quantiles. This paper develops simulation-based procedures for evaluating reduced-form tests for consumption spillovers. I find that the correlation found in prior tests may be spurious, arising from the mechanical relationship between a household’s income in a given period and a quantile of the income distribution in that period. This paper also explores the mechanical correlation’s determinants and proposes strategies for estimating unbiased consumption spillover effects.
... Our paper tests, the "Veblen"-effect -or the "keeping up with the Novaks"-effect 2 as we name it for the individuals in the CESEE countries-the idea that the own consumption is driven by the consumption of a more affluent reference group thus ultimately driving also indebtedness (e.g Carr and Jayadev 2015). For that purpose we apply a less known measure of income inequality i.e the relative income ratio, which gives the average income of other households in similar groups as compared to the own income (in line with papers such as Drechsel- Grau and Schmid 2014). Furthermore, income inequality could be a "signaling"-factor indicating the creditworthiness of borrowers to lenders (i.e banks). ...
... demand-side perspective, empirical research has emphasized that interpersonal com- parisons are upward-looking: households compare their consumption to richer households and adjust their consumption preferences accordingly(Ferrer-i Carbonell 2005, Carr andJayadev 2015). Similar toHake and Poyntner (2019), we follow Drechsel-Grau and Schmid (2014)and define first the households' reference income to account for upward-looking comparisons. In particular, Drechsel-Grau and Schmid (2014) focus on consumption and define reference consumption as the consumption level of all households who are perceived to be richer and the reference consumption ratio as the mean reference consumption to the own consumption. ...
This paper constitutes an initial attempt to shed light on the role of income distribution in household debt and financial market access in Central, Eastern and Southeastern Europe (CESEE). Using household-level data from the OeNB's Euro Survey for the period 2009-2018, we address the question whether interpersonal comparisons ("keeping up with the CESEE Joneses" i.e. "the Novaks") affect the probability of having and planning a loan. Applying multilevel probit modeling to take into account the hierarchical structure of the data, our results support the notion that higher income inequality is negatively correlated with the probability of having a loan at the bottom of the distribution, and positively at the top. We show this impact for almost all components of household debt, but evidence is strongest for mortgage, car and foreign currency loans. Interpersonal comparisons turn out to drive loan intentions, however, mainly on the very top of the income distribution.
... Yet, if households engage in upward-looking interpersonal comparison, middle-and low income earners might lower their saving rate in response to rising top incomes (Drechsel- Grau and Schmid, 2014;Bertrand and Morse, 2016). Thus an increase in inequality could just as well trigger expenditure cascades and a decline in aggregate saving (Alvarez- Cuadrado and El-Attar Vilalta, 2012; Frank et al., 2014). ...
... Based on this result they estimate that in 2005 the aggregate personal saving rate in the US might have been 1.1 to 1.3 percent higher, if income growth at the top had not outpaced growth at median levels. Finally, Drechsel-Grau and Schmid (2014) show that "keeping up with the Joneses behaviour" is not limited to one side of the Atlantic. ...
Within three self-contained chapters, this dissertation provides new insights into the macroeconomic consequences of income inequality from a global perspective. Following an introduction, which summarizes the main findings and offers a brief overview of trends in income distribution, Chapter 2 evaluates the relationship between the labor share of income and the evolution of aggregate demand. Chapter 3 analyzes the link between income inequality and aggregate saving; and Chapter 4 directly estimates the effect of inequality and public redistribution on economic growth.
... Although household saving constitutes a common transmission variable in all these strands of literature, the link between income inequality and saving is theoretically and empirically unclear: As richer households tend to have a higher propensity to save than households at the lower end of the income distribution (e.g., Dynan et al., 2004), an increase in income inequality may cause a rise in aggregate saving (Keynes, 1936(Keynes, , 1939). Yet, if households engage in upward-looking interpersonal comparison, middle-and low income earners might lower their saving rate in response to rising top incomes (Drechsel-Grau and Schmid, 2014;Bertrand and Morse, 2016). Thus an increase in inequality could just as well trigger expenditure cascades and a decline in aggregate saving (Alvarez-Cuadrado and El-Attar Vilalta, 2012;Frank et al., 2014). ...
... Based on this result they estimate that in 2005 the aggregate personal saving rate in the US might have been 1.1 to 1.3 percent higher, if income growth at the top had not outpaced growth at median levels. Finally, Drechsel-Grau and Schmid (2014) show that "keeping up with the Joneses behaviour" is not limited to one side of the Atlantic. Using data from the German Socio-Economic Panel they find that an increase in reference consumption by 1% leads households to raise their own consumption by about 0.3%. ...
... Essentially, these results show that, in line with the Keynesian postulation, rising personal income tends to stimulate savings. Indeed, many studies (e.g., Drechsel-Grau & Schmid, 2014;Kong & Dickinson, 2016;Abasimi & Martin, 2018) have confirmed that a major dividing line in terms of savings performance among countries is the level of per capita income. The general government final consumption expenditure variable exerts a negative and significant impact on savings rate in the baseline model and across the various countries' groupings in the SSA. ...
In this study, the major determinants of gross domestic savings are examined for
twenty-five sub-Saharan African (SSA) countries over the period 2000 to 2017. The
Fully Modified Ordinary Least Squares (FMOLS) methodology is employed in the
empirical analysis. It is revealed that fiscal policy and financial variables, as well as
demographic factors, have significant impacts on the gross domestic savings in the
SSA countries. The impacts of macroeconomic variables are found to be relatively
weak. There is also evidence that regional membership groupings of SSA countries
significantly explain the savings behaviour of the countries, although there are also
country-specific effects. There are policy options to be considered on the basis of the
findings: the need for the application of spending and tax options to smoothen
critical variations in savings through measures to boost gross income; reforms in the
financial sector to boost bank-stimulated savings; and policies to reduce debt
vulnerability and encourage economic diversification. Regional economic blocs are
also expected to intensify measures to strengthen savings among the member
countries through integration.
... Walasek et al. [2018] find that income inequality is associated with high frequency and greater positivity of tweets mentioning luxury brands, and less frequent tweets mentioning low status brands (see also Walasek and Brown [2015]). Relatedly, Bellet and Colson-Sihra [2018] find that inequality has an effect on the consumption of luxury goods by poor individuals in India (see also Drechsel-Grau and Schmid [2014]). Formal models of this literature also predict a positive link between inequality and conspicuous good consumption, as for example the models on social rank proposed by Daly et al. [2015] and by Walasek and Brown [2016]. ...
This paper adapts ideas from social identity theory to set out a new framework for modelling conspicuous consumption. Notably, this approach can explain two stylised facts about conspicuous consumption that initially seem at odds with one another, and to date have required different families of models to explain each: (1) people consume more visible goods when their neighbours' incomes rise, but (2) consume less visible goods when incomes of those with the same race in a wider geographic area rise. The first fact is typically explained by `Keeping up with the Joneses' models, and the second by signalling models. Our model also explains related features of conspicuous consumption: that the rich are more sensitive to others' incomes than the poor, and that the effect of income inequality on consumption differs qualitatively across groups. Importantly, it explains this fourth stylised fact without falling back on differences in preferences across groups, as required in other models. In addition, our model delivers new testable predictions regarding the role of network structure and income inequality for conspicuous consumption.
... Aggregating this effect over the whole distribution results in expenditure cascades where total consumption increases and saving decreases, leading to a higher demand for imports and a deterioration in the current account balance (Kim et al., 2014a;Belabed, 2017). There is evidence that expenditure cascades are stronger if the shift in income distribution happens at the top as consumption patterns trickle down to the bottom (Drechsel-Grau and Schmid, 2014;Frank et al., 2014;Bertrand and Morse, 2016). Rather than contrasting differential savings rates versus expenditure cascades, Bofinger and Scheuermeyer (2018) find evidence for both hypotheses depending on the degree of income inequality in an economy. ...
Rising current account imbalances around the globe preceded the Great Recession in the late 2000s. These imbalances narrowed significantly during the crisis mainly due to a negative demand shock and plummeting imports in deficit countries. While income inequality and household debt played a pivotal role in current account imbalances prior to the crisis, it is unclear whether these relations still hold when including the post-crisis era. We estimate current account determinants using a panel of 31 OECD countries over 45 years and include measures for functional and personal income distribution as well as household debt. We find a sustained relation between income inequality and current accounts when including the post-crisis period, while the link to household debt diminishes, indicating a change in the debt regime in a number of countries.
... The authors conclude that relative income concerns explain a significant part of the strong increase in household debt for the period 1999-2009. Using data from the German Socio-Economic Panel, Drechsel-Grau and Schmid (2014) demonstrate that upward looking comparison is a significant determinant of individuals' consumption decisions. ...
In this study, we set up a dynamic stochastic general equilibrium (DSGE) model with upward looking consumption comparison and show that consumption externalities are an important driver of consumer credit dynamics. Our model economy is populated by two different household types. Investors, who hold the economy's capital stock, own the firms and supply credit, and workers, who supply labor and demand credit to finance consumption. Furthermore, workers condition their consumption choice on the investors' level of consumption. We estimate the model and find a significant keeping up mechanism by matching business cycle statistics. In reproducing credit moments, our proposed model significantly outperforms a model version in which we abstract from consumption externalities.
... For example, Klapper et al. (2015) find that <50% of credit-card owners fully understand how interest compounding can inflate total amounts owed. Even when households were aware of the risks of enhanced indebtedness, overborrowing may still occur as a means to maintain or even achieve a higher social status (Ahlquist & Ansell, 2017;Drechsel-Grau & Schmid, 2014;Georgarakos, Haliassos, & Pasini, 2014). Put differently, to "keep up with the Joneses," many households in the lower and middle end of the distribution may demand more credit relative to what they can truly afford and give in to the temptations of easy credit (Bertrand & Morse, 2016;Frank, 2013;Levine, Frank, & Dijk, 2010). ...
This paper tests the existence of political credit cycles, the positive comovement between credit and elections. While several single‐country studies point to the existence of this relationship, the link between electoral cycles and credit expansion has seen little exploration at the multicountry level. Using a comprehensive dataset covering bank and non‐bank credit in 165 countries from 1960 to 2013, we show that both government and private credit significantly increase in election years. This finding suggests the possibility that politicians use not only fiscal and monetary policy to court voters, but also implement credit policies such as interest rate subsidies and tax breaks for debt to enhance credit growth. We also find that a higher degree of financial openness weakens the frequency and magnitude of political credit cycles; yet, the conditional effect of financial openness is stronger for developing countries than developed economies.
... En conclusión, los ingresos influyen en las inversiones a corto y largo plazo, esto se debe a que los ingresos futuros esperados se recibirán más en el futuro, en comparación con el consumo actual, más ingresos, el mayor consumo. DRECHSEL-GRAU & SCHMID (2014) says that the influence of consumption influence of aggregate household consumption, which is considered to have an increasing income. When controlling a person's income, so does with individual and local differences in consumption, which will cause the household to raise consumption level. ...
This study aims to analyze the influence of income, inflation, and population towards consumption in Indonesia by using panel ARDL panel. Panel data in this study is from 2008 to 2017 and covers 34 provinces, with a total of 340 samples. The results showed that income, inflation, and population affect the consumption of both the short and long run. Short-term influence is better rather than long-term. In conclusion, the income has an influence on long and short-run investments, this is because future income expected received higher in the future, compare to current consumption, more income, the larger consumption. Consumo en Indonesia: una aplicación de datos del panel ARDL Resumen Este estudio tiene como objetivo analizar la influencia del ingreso, la inflación y la población hacia el consumo en Indonesia mediante el uso del panel ARDL. Los datos del panel en este estudio son de 2008 a 2017 y cubren 34 provincias, con un total de 340 muestras. Los resultados mostraron que el ingreso, la inflación y la población afectan el consumo tanto a corto como a largo plazo. La influencia a corto plazo es mejor que a largo plazo. En conclusión, los ingresos influyen en las inversiones a corto y largo plazo, esto se debe a que los ingresos futuros esperados se recibirán más en el futuro, en comparación con el consumo actual, más ingresos, el mayor consumo.
... 4 We discuss the determinacy properties of the model in the Appendix. 6 is based on observed interactions amongst heterogeneous consumers (Chan and Kogan 2002;Boyce et al. 2010;Frank et al. 2010;Drechsel-Grau and Schmid, 2014). In our context, the choice of group-speci…c habits is open to criticism because it limits the interaction between the two households groups that crucially a¤ects both consumption choices and wage-setting decisions (see Motta and Tirelli, 2013). ...
We estimate a medium‐scale dynamic stochastic general equilibrium model for the Euro area with limited asset market participation (LAMP). Our results suggest that in the recent European Monetary Union years LAMP is particularly sizable (39% during 1993–2012) and important to understand business cycle features. The Bayes factor and the forecasting performance show that the LAMP model is preferred to its representative household counterpart. In the representative agent model the risk premium shock is the main driver of output volatility in order to match consumption correlation with output. In the LAMP model this role is played by the investment‐specific shock, because non‐Ricardian households introduce a Keynesian multiplier effect and raise the correlation between consumption and investments. We also detect the contractionary role of monetary policy shocks during the post‐2007 years. In this period consumption of non‐Ricardian households fell dramatically, but this outcome might have been avoided by a more aggressive policy stance. (JEL C11, C13, C32, E21, E32, E37)
... The value of the natural rate of imitation is taken fromBelabed et al. (2018). Also notice that the penalty rate for B falls within the range [0.18 − 0.35] empirically identified byDrechsel-Grau and Schmid (2014) as the effective rate of imitation for Germany.Content courtesy of Springer Nature, terms of use apply. Rights reserved. ...
Our paper investigates the impact of rising inequality in a two-country macroeconomic model with an agent-based household sector characterized by peer effects in consumption. In particular, the model highlights the role of inequality in determining diverging balance of payments dynamics within a currency union. Inequality may drive the two countries into different growth patterns: where peer effects in consumption interact with higher credit availability, rising income inequality leads to the emergence of a debt-led growth. Where social norms determine weaker emulation and credit availability is lower, an export-led regime arises. Eventually, a crisis emerges endogenously due to the sudden-stop of capital flows from the net lending country, triggered by the excessive risk associated with the dramatic amount of private debt accumulated by households in the borrowing country. Monte Carlo simulations for a wide range of calibrations confirm the robustness of our results.
... If the rich got richer, but don't spend more, there would be no cascade. The empirical support for expenditure cascades is relatively recent, and the results are mixed (see, e.g., Christen and Morgan 2005;Leigh and Posso 2009;and Drechsel-Grau and Schmid 2014). That the results of the effects of expenditure cascades on household debt accumulation at present are also mixed and limited calls for further testing of the expenditure cascades hypothesis. ...
Household debt is at a record high in most Organisation for Economic Co-operation and Development (OECD) countries and it played a crucial role in the recent financial crisis. Several arguments on the macroeconomic drivers of household debt have been put forward, and most have been empirically tested, albeit in isolation of each other. This article empirically tests 7 competing hypotheses on the macroeconomic determinants of household indebtedness together in one econometric study. Existing arguments suggest that residential house prices, upward movements in the prices of assets demanded by households, the income share of the top 1%, falling wages, the rolling back of the welfare state, the age structure of the population, and the short-term interest rate drive household indebtedness. We formulate these arguments as hypotheses and test them for a panel of 13 OECD countries over the period 1993–2011 using error correction models. We also investigate whether effects differ in boom and bust phases of the debt and house price cycles. The results show that the most robust macroeconomic determinant of household debt is real residential house prices, and that the phase of the debt and house price cycles plays a role in household debt accumulation.
Purpose
The purposes of this study are to contribute to the limited green growth (GG) literature in emerging markets, to analyze GG from a financial economy perspective and to determine the contribution of financial development and innovation to GG in Brazil, Russian Federation, India, China and South Africa and Türkiye (BRICS-T). BRICS-T countries significantly impact the world population, international politics, energy resources and economy. In addition, BRICS-T countries are one of the leading countries in the world with their sustainability efforts. Investigating the GG model in these countries may contribute to structuring emerging economies around the principles of GG and advancing global green transformation efforts.
Design/methodology/approach
The authors applied panel data analysis from 2001 to 2019. GG is economic growth free from environmental depletion in the model. National income, personnel expenditure and foreign direct investments are macroeconomic variables. These variables measure economic development and promote economic and social progress, which is essential for GG. Capital accumulation and innovation are essential tools in GG transformation. Therefore, financial development and patent applications represent the moderating variables. The authors estimate the fixed effect model with Parks-Kmenta robust.
Findings
Empirical results show that national income growth and foreign direct investments positively affect GG. Personnel expenditure negatively affects GG. On the contrary, financial development and patent growth have little moderating role.
Originality/value
This study contributes to the literature on creating a GG model in emerging countries. The study is original in its model and sample.
This study analyzes the relationship between income distribution and consumption
expenditures in OECD countries. In this framework, a data set covering 34 OECD countries and the
period 1970-2021 is used. In the study, the "Dynamic panel data" technique is applied to eliminate
the endogeneity problem and to better explain the dynamic process in the long run. In addition, the
relationship analyzed through three different income distribution indicators. The hypotheses of Frank
(2014) and Christensen and Morgan (2005), which are considered extensions of the relative income
hypothesis, are tested, and it is also questioned whether the results are robust. The findings show that
an increase in income inequality increases total expenditures. This result confirms the "conspicuous
consumption" phenomenon and therefore supporting Duesenberry's (1949) hypothesis. Accordingly,
an increase in income inequality increases total expenditures through conspicious consumption.
This paper investigates the trickle-down consumption effect and the moderating effect of digital finance in China. Three realistic patterns motivate this study; trickle-down consumption has been confirmed in many developed countries, digital finance facilitates household consumption, and China exhibits income inequality across regions. Using data from the 2017 and 2019 China Household Finance Survey, we find that Chinese households exhibit trickle-down consumption behavior and that digital finance development moderates the trickle-down consumption; this moderating effect is somewhat heterogeneous by year, geographic location, hukou, and household income. The mechanism analysis results confirm that the relaxation of liquidity constraints is the primary channel through which our positive moderating effect operates. Our findings are robust to various tests, and alternative specifications are also discussed. Some policies are suggested to alleviate consumption inequality by developing digital finance and stimulating a natural pattern of trickle-down consumption in China.
Based on experience in the United States in recent decades, Rajan (2010) argues that there is an inequality-debt-crisis nexus, that is, income inequality may contribute to banking crises by stimulating the accumulation of household debt. Whether and to what extent Rajan’s hypothesis has been confirmed (or refuted) by the literature is investigated in this study. It is shown that the validity of Rajan’s theory depends on the level of strictness of the standards that are established to estimate the extent of agreement between theory and evidence. This conditional validity can be attributed to the multidimensional nature of the inequality-debt-crisis nexus, which is overlooked by Rajan.
JEL Classification: D31, E51, G21, G51
Purpose
The purpose of this paper is to study which factors affect consumer expenditure and how, when positional concerns matter. It also investigates how consumers finance and reallocate their expenditure, and modify their consumer baskets when members of their reference groups spend more on positional goods, and they do not want to lag behind.
Design/methodology/approach
A literature review is presented, and then a new model is developed from a behavioural economic perspective. It describes how consumers with various risk attitudes reallocate their consumer expenditure and modify their consumer baskets when consumption externalities influence their relative consumption due to a positional game, but they want to “keep up with the Joneses”.
Findings
Consumers with different risk attitudes finance and reallocate their consumption expenditures variously to sustain their relative positions. Risk-neutral, slightly and intermediately risk-seeking consumers achieve a lower utility level than others. They do not realise a utility-maximising consumer basket, as it includes a relatively low number of nonpositional goods, but this choice can be considered the best response in a positional game in order to sustain their relative position.
Originality/value
The relationship between positional and nonpositional goods is explicitly described. The model assumes that consumers can be classified based on their risk attitudes when positional concerns matter. It also describes how consumers with various risk attitudes reallocate their consumer expenditure when they want to sustain or improve their relative consumption in a positional game.
The global financial crisis wreaked havoc on the European economy and dented consumer confidence. This paper exploits a panel dataset of 18 EU countries over the period 2001–2014 to examine whether this decrease in consumer confidence affected household saving behaviors and if so, which specific sub-indicators of consumer sentiment played the most significant role. To tackle the issue of potential endogeneity between household saving rates and consumer confidence, we use an instrumental variable approach. Our results suggest that confidence in household financial situations has a substantially larger effect on household saving than confidence in the general economic situation. Moreover, we find that the impact of consumer confidence on household saving has increased after the crisis, potentially due to a threshold effect.
Drawing on a panel of advanced economies, this paper documents a concave and non‐monotonic link between inequality and the aggregate household saving rate. We find that, at a low level of inequality, more inequality is associated with higher saving; but we also show that a negative relationship between inequality and saving prevails where inequality is high. Using different empirical approaches, we locate the turning point, where the marginal effect of inequality turns from positive to negative, at a net income Gini coefficient of around 30. Moreover, we show that the relationship between inequality and saving also depends on financial market conditions. While inequality increases saving, when credit is scarce it tends to reduce saving at high levels of credit. This paper primarily focuses on household saving, yet we also find some evidence for a non‐monotonic effect of inequality on private saving, national saving, and the current account balance.
Against the ongoing assessment of the root causes of rising economic inequality in industrialized countries, analyses of the distribution of savings along the income and wealth distribution are of high interest. We analyze the concentration of household savings in Germany by estimating saving amounts, saving rates and shares in aggregate savings across income and wealth groups. Our calculations are based on the Sample Survey of Household Income and Expenditure (EVS), containing more than 40,000 households in Germany. We show that the concentration of savings is substantial: while the top income decile's share in total savings reaches 60 percent, the lower half of the income distribution on average does not save at all. Across wealth groups the concentration of savings is somewhat less pronounced. We also look beyond the top income threshold underlying the EVS (18,000 euros of monthly net household income) and demonstrate that corrected saving rates for the top income groups are considerably higher than those derived from the EVS alone. Hence, the top income groups' shares in aggregate savings exceed estimated shares solely based on EVS data, revealing a substantially more pronounced concentration of savings along the income distribution. © 2018 Oldenbourg Wissenschaftsverlag GmbH, Published by De Gruyter Oldenbourg, Berlin/Boston 2018.
We develop a three-country, stock-flow-consistent macroeconomic model to study the effects of changes in both personal and functional income distribution on national current account balances. The model is calibrated for the USA, Germany and China. Simulations suggest that a substantial part of the increase in household debt and the decrease in the current account in the USA since the early 1980s can be explained by the interplay of rising (top-end) household income inequality and institutions. On the other hand, the weak domestic demand and increasing current account balances of Germany and China since the mid-1990s are strongly related to shifts in the functional income distribution at the expense of the household sector. © The Author(s) 2017. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.
Several recent studies link rising income inequality in the United States to the global financial crisis, arguing that US politicians did not respond to growing inequality with fiscal redistribution. Instead, Americans saved less and borrowed more to maintain relative consumption in the face of widening economic disparities. This article proposes a theory in which fiscal redistribution dampens the willingness of citizens to borrow to fund current consumption. A key implication is that pretax inequality will be more tightly linked with credit in less redistributive countries. The long-run partisan composition of government is, in turn, a key determinant of redistributive effort. Examining a panel of eighteen OECD democracies, the authors find that countries with limited histories of left-wing participation in government are significantly more likely see credit expansion as prefisc inequality grows compared to those in which the political left has been more influential.
We present a formal model with heterogeneous households examining the dynamics of wealth disparity. We concentrate on financial wealth and study asset accumulation in terms of net wealth. Households borrow to finance investment and consumption. If the asset value is larger then the liability, then new net wealth is accumulated. The question then becomes what variables drive differences in net asset accumulation among households. The returns on assets, saving rates and borrowing capacity are major driving forces behind the differences in asset accumulation among households. The empirical part utilizes US Survey of Consumer Finance (SCF) data and supports the theoretical model. Specifically, the paper finds substantial evidence suggesting that when income groups are subdivided into those that dominantly borrow for consumption and those that dominantly borrow for investment (functioning as consumption smoothers), the former group suffers losses in net wealth while the latter maintains a steady increase in net worth.
Over the last thirty years the U.S. experienced a surge in income inequality coupled with increasing levels of borrowing. We model an OLG economy populated by two types of household that care about how their consumption compares to that of their peers. In this framework individual debt-to-income ratios decrease with income, increases in consumption of rich households lead to increases in consumption of the rest, and aggregate borrowing increases with income inequality. We calibrate our model to evaluate the welfare implications of the process of financial liberalization that began in the 1980s. Our analysis suggests that some of the financial developments that lead to the recent expansion of credit may have decreased, rather than increased, welfare.
This paper investigates whether the consumption of rich households provides a reference point in the intertemporal consumption choices of non-rich households. Using UK household data on food consumption, we estimate the Euler equation implied by a life-cycle model incorporating relative concerns for the consumption of rich households. According to both our OLS and GMM estimates, for the population of non-rich households as a whole, there is no evidence of such relative concerns. We also examine an alternative model of relative concerns in which households over-consume when exposed to higher reference group consumption, and find correlational evidence that this may be the case for food consumed away from home. Finally, we investigate the presence of heterogeneous relative concerns (across county and household characteristics) in both models, finding evidence of relative concerns (for consumption at the top) in counties with relatively low income inequality. This mechanism seems to operate for food consumed away from home.
Is there a positive association between a nation’s income inequality and concerns with status competition within that nation? Here we use Google Correlate and Google Trends to examine frequency of internet search terms and find that people in countries in which income inequality is high search relatively more frequently for positional brand names such as Prada, Louis Vuitton, or Chanel. This tendency is stronger among well-developed countries. We find no evidence that income alone is associated with searches for positional goods. We also present evidence that the concern with positional goods does not reflect non-linear effects of income on consumer spending, either across nations or (extending previous findings that people who live in unequal US States search more for positional goods) within the USA. It is concluded that income inequality is associated with greater concerns with positional goods, and that this concern is reflected in internet searching behaviour.
We estimate a medium scale DSGE model for the Euro Area to gain intuition on the importance of Limited Asset Market Participation (LAMP). Our results suggest that LAMP is sizeable (39% of households over the 1993-2012 sample) and important to understand EMU business cycle, especially, in the light of the recent …nancial crisis. In comparison with the representative households counterpart, the LAMP model is preferred on the grounds of both the Bayes factor and the average forecasting performance. Given the tighter credit standards we might expect in the near future, the high proportion of LAMP households is likely to remain an important feature of EMU. We also …nd that the LAMP model leads to conclusions about the main determinants of EMU business cycle that are substantially di¤erent from those obtained under the representative agent hypothesis. Given these results, the LAMP hypothesis should be part and parcel of empirical DSGE models of the Euro area.
There is a growing literature comparing the current nancial crisis or Great Recession to the worst economic crisis of capitalism, the Great Depression. However, the role of rising income inequality, which has risen dramatically before both crises, is rarely discussed. In this paper we discuss the rise of top-end inequality and its eects on household consumption, saving, and debt for the 1920s by applying a non-standard theory of consumption, the relative income hypothesis, to the period of interest. We argue that income inequality is linked to the increase of household consumption and the simultaneous decline of household savings as well as rapidly increasing household debt. Thus, the rise of top-end inequality in connection with deregulation of financial market innovation has contributed to a build-up of financial and macroeconomic instability, in the period leading to the Great Depression.
This paper studies the empirical and theoretical link between increases in income inequality and increases in current account deficits. Cross-sectional econometric evidence shows that higher top income shares, and also financial liberalization, which is a common policy response to increases in income inequality, are associated with substantially larger external deficits. To study this mechanism we develop a DSGE model that features workers whose income share declines at the expense of investors. Loans to workers from domestic and foreign investors support aggregate demand and result in current account deficits. Financial liberalization helps workers smooth consumption, but at the cost of higher household debt and larger current account deficits. In emerging markets, workers cannot borrow from investors, who instead deploy their surplus funds abroad, leading to current account surpluses instead of deficits.
The theory that happiness is relative is based on three postulates: (1) happiness results from comparison, (2) standards of comparison adjust, (3) standards of comparison are arbitrary constructs. On the basis of these postulates the theory predicts: (a) happiness does not depend on real quality of life, (b) changes in living-conditions to the good or the bad have only a shortlived effect on happiness, (c) people are happier after hard times, (d) people are typically neutral about their life. Together these inferences imply that happiness is both an evasive and an inconsequential matter, which is at odds with corebeliefs in present-day welfare society.Recent investigations on happiness (in the sense of life-satisfaction) claim support for this old theory. Happiness is reported to be as high in poor countries as it is in rich countries (Easterlin), no less among paralyzed accident victims than it is among lottery winners (Brickman) and unrelated to stable livingconditions (Inglehart and Rabier). These sensational claims are inspected but found to be untrue. It is shown that: (a) people tend to be unhappy under adverse conditions such as poverty, war and isolation, (b) improvement or deterioration of at least some conditions does effect happiness lastingly, (c) earlier hardship does not favour later happiness, (d) people are typically positive about their life rather than neutral.It is argued that the theory happiness-is-relative mixes up overall happiness with contentment. Contentment is indeed largely a matter of comparing life-as-it-is to standards of how-life-should-be. Yet overall hapiness does not entirely depend on comparison. The overall evaluation of life depends also on how one feels affectively and hedonic level of affect draws on its turn on the gratification of basic bio-psychological needs. Contrary to acquired standards of comparison these innate needs do not adjust to any and all conditions: they mark in fact the limits of human adaptability. To the extend that it depends on need-gratification, happiness is not relative.
Although it appears that income and subjective well-being correlate in within-country studies (Diener, 1984), a debate has focused on whether this relationship is relative (Easterlin, 1974) or absolute (Veenhoven, 1988, 1991). The absolute argument advanced by Veenhoven states that income helps individuals meet certain universal needs and therefore that income, at least at lower levels, is a cause of subjective well-being. The relativity argument is based on the idea that the impact of income or other resources depends on changeable standards such as those derived from expectancies, habituation levels, and social comparisons. Two studies which empirically examine these positions are presented: one based on 18 032 college studies in 39 countries, and one based on 10 year longitudinal data in a probability sample of 4 942 American adults. Modest but significant correlations were found in the U.S. between income and well-being, but the cross-country correlations were larger. No evidence for the influence of relative standards on income was found: (1) Incomechange did not produce effects beyond the effect of income level per se, (2) African-Americans and the poorly educated did not derive greater happiness from specific levels of income, (3) Income produced the same levels of happiness in poorer and richer areas of the U.S., and (4) Affluence correlated with subjective well-being both across countries and within the U.S. Income appeared to produce lesser increases in subjective well-being at higher income levels in the U.S., but this pattern was not evident across countries. Conceptual and empirical questions about the universal needs position are noted. Suggestions for further explorations of the relativistic position are offered.
This paper attempts to test the hypothesis that utility depends on income relative to a ‘comparison’ or reference level. Using data on 5,000 British workers, it provides two findings. First, workers' reported satisfaction levels are shown to be inversely related to their comparison wage rates. Second, holding income constant, satisfaction levels are shown to be strongly declining in the level of education. More generally, the paper tries to help begin the task of constructing an economics of job satisfaction.
The question of whether higherlifetime income households save a larger fraction of their income was the subject of much debate in the 1950s and 1960s, and while not resolved, it remains central to the evaluation of tax and macroeconomic policies. We resolve this long-standing question using new empirical methods applied to the Panel Study of Income Dynamics, the Survey of Consumer Finances, and the Consumer Expenditure Survey. We find a strong positive relationship between saving rates and lifetime income and a weaker but still positive relationship between the marginal propensity to save and lifetime income. There is little support for theories that seek to explain these positive correlations by relying solely on time preference rates, nonhomothetic preferences, or variations in Social Security benefits. There is more support for models emphasizing uncertainty with respect to income and health expenses, bequest motives, and asset-based means testing or behavioral factors causing minimal saving rates among low-income households.
This paper examines the role for tax policies in productivity-shock driven economies with catching-up-with-the-Joneses utility functions. The optimal tax policy is shown to affect the economy countercyclically via procyclical taxes, i.e., "cooling down" the economy with higher taxes when it is "overheating" in booms and "stimulating" the economy with lower taxes in recessions to keep consumption up. Thus, models with catching-up-with-the-Joneses utility functions call for traditional Keynesian demand-management policies but for rather unorthodox reasons.
Over the past few years, there has been a steadily increasing interest on the part of economists in happiness research. We argue that reported subjective well-being is a satisfactory empirical approximation to individual utility and that happiness research is able to contribute important insights for economics. We report how the economic variables income, unemployment and inflation affect happiness as well as how institutional factors, in particular the type of democracy and the extent of government decentralization, systematically influence how satisfied individuals are with their life. We discuss some of the consequences for economic policy and for economic theory.
Although middle-income families don't earn much more than they did several decades ago, they are buying bigger cars, houses, and appliances. To pay for them, they spend more than they earn and carry record levels of debt. In a book that explores the very meaning of happiness and prosperity in America today, Robert Frank explains how increased concentrations of income and wealth at the top of the economic pyramid have set off "expenditure cascades" that raise the cost of achieving many basic goals for the middle class. Writing in lively prose for a general audience, Frank employs up-to-date economic data and examples drawn from everyday life to shed light on reigning models of consumer behavior. He also suggests reforms that could mitigate the costs of inequality. Falling Behind compels us to rethink how and why we live our economic lives the way we do.
This paper investigates whether individuals feel worse off when others around them earn more. In other words, do people care
about relative position, and does “lagging behind the Joneses” diminish well-being? To answer this question, I match individual-level data
containing various indicators of well-being to information about local average earnings. I find that, controlling for an individual's
own income, higher earnings of neighbors are associated with lower levels of self-reported happiness. The data's panel nature
and rich set of measures of well-being and behavior indicate that this association is not driven by selection or by changes
in the way people define happiness. There is suggestive evidence that the negative effect of increases in neighbors' earnings
on own well-being is most likely caused by interpersonal preferences, that is, people having utility functions that depend
on relative consumption in addition to absolute consumption.
. Policy responses to the global financial meltdown of 2008 and the collapse of aggregate demand have largely been driven by domestic interests. Resurgent protectionism, bank bail-outs and national-level stimulus packages are distorting competition and incentives to the detriment of developing countries, much-needed spending on social protection and, ultimately, rapid global economic recovery. Warning against underestimation of the job-destruction potential of the current crisis, the author argues for a truly global stimulus package, together with a rethink of economic paradigms and regulatory policies, financial assistance to developing countries, a less constraining IMF, and stronger social protection as an automatic stabilizer of economies.
In 2001, Joseph Stiglitz was awarded the Nobel Prize for economics. In 2002, he published an article in the Review (Vol. 141, No. 1-2) entitled "Employment, social justice and societal well-being" in which he proposes that the purpose of economic activity is to improve the well-being of individuals, and that employment is essential to this well-being. In this regard, his description of the negative effects of unemployment echoes that given in the abovementioned article by Amartya Sen ... [more] In 2001, Joseph Stiglitz was awarded the Nobel Prize for economics. In 2002, he published an article in the Review (Vol. 141, No. 1-2) entitled Employment, social justice and societal well-being in which he proposes that the purpose of economic activity is to improve the well-being of individuals, and that employment is essential to this well-being. In this regard, his description of the negative effects of unemployment echoes that given in the abovementioned article by Amartya S...
Have rising income and consumption at the top of income distribution since the early 1980s induced households in the lower tiers of the distribution to consume a larger share of their income? Using state-year variation in income level and consumption in the top first quintile or decile of the income distribution, we find evidence for such “trickle-down consumption.” The magnitude of effect suggests that middle income households would have saved between 2.6 and 3.2 percent more by the mid-2000s had incomes at the top grown at the same rate as median income. Additional tests argue against permanent income, upwardly-biased expectations of future income, home equity effects and upward price pressures as the sole explanations for this finding. Instead, we show that middle income households’ consumption of more income elastic and more visible goods and services appear particularly responsive to top income levels, consistent with supply-driven demand and status-driven explanations for our primary finding. Non-rich households exposed to higher top income levels self-report more financial duress; moreover, higher top income levels are predictive of more personal bankruptcy filings. Finally, focusing on housing credit legislation, we suggest that the political process may have internalized and facilitated such trickle-down.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
In his widely discussed book "Fault Lines" (2010), Raghuram Rajan argues that many U.S. consumers have reacted to the decline in their relative permanent incomes since the early 1980s by reducing saving and increasing debt. This has temporarily kept private consumption and thus aggregate demand and employment high, despite stagnating incomes for many households. But it also contributed to the creation of a credit bubble, which eventually burst, and a large current account deficit in the United States. We place the Rajan hypothesis in the context of competing theories of consumption, and survey the empirical literature on the effects of inequality on household behaviour beyond the largely anecdotal evidence provided in Rajan (2010). We argue that the Rajan hypothesis, supported by the empirical evidence, calls for a renaissance of the relative income hypothesis of consumption.
We use survey data to provide some empirical information about concerns regarding relative standing. Respondents chose between a world where they have more of a good than others and one where everyone's endowment of the good is higher, but the respondent has less than others. Questions asked about education, attractiveness and intelligence for one's child and oneself, income, vacation time, approval and disapproval from a supervisor, and papers to write. Half of the respondents preferred to have 50% less real income but high relative income. Concerns about position were strongest for attractiveness and supervisor's praise and weakest for vacation time.
This paper shows that, consistent with a signaling-by-consuming model à la Veblen, income elasticities can be predicted from the visibility of consumer expenditures. We outline a stylized conspicuous consumption model where income elasticity is endogenously predicted to be higher if a good is visible and lower if it is not. We then develop a survey-based measure of expenditure visibility, ranking different expenditures by how noticeable they are to others. Finally, we show that our visibility measure predicts up to one-third of the observed variation in elasticities across consumption categories in U.S. data. © 2011 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Is it better to be a big frog in a small pond or a small frog in a big pond? In this lively and original book, the author argues persuasively that people's concerns about status permeate and profoundly alter a broad range of human behaviour. He takes issue with his fellow economists for too often neglecting fundamental elements in human nature in their study of how people make basic economic choices.
We analyze the distribution of market income in Germany in the period 1992 to 2003 on the basis of an integrated dataset that encompasses the whole spectrum of the population, from the very poor to the very rich. We find a modest increase of the Gini coefficient, a substantial drop of median income and a remarkable growth of the income share accruing to the economic elite, which we define as the richest 0.001 percent of persons in the population. While the elite mainly obtains its income from business and capital, the income share that it receives in the form of wage income has been increasing. We also show that the dramatic decline of market income in the bottom half of the distribution is very much mitigated by income transfers within private households and by governmental redistribution. Copyright 2009 The Authors. Journal compilation International Association for Research in Income and Wealth 2009.
This paper uses Social Security Administration longitudinal earnings micro data since 1937 to analyze the evolution of inequality
and mobility in the United States. Annual earnings inequality is U-shaped, decreasing sharply up to 1953 and increasing steadily
afterward. Short-term earnings mobility measures are stable over the full period except for a temporary surge during World
War II. Virtually all of the increase in the variance in annual (log) earnings since 1970 is due to increase in the variance
of permanent earnings (as opposed to transitory earnings). Mobility at the top of the earnings distribution is stable and
has not mitigated the dramatic increase in annual earnings concentration since the 1970s. Long-term mobility among all workers
has increased since the 1950s but has slightly declined among men. The decrease in the gender earnings gap and the resulting
substantial increase in upward mobility over a lifetime for women are the driving force behind the increase in long-term mobility
among all workers.
In this paper we first document inequality trends in wages, hours worked, earnings, consumption, and wealth for Germany from the last twenty years. We generally find that inequality was relatively stable in West Germany until the German reunification, and then trended upwards for wages and market incomes, especially after about 1998. Disposable income and consumption, on the other hand, display only a modest increase in inequality over the same period. These trends occurred against the backdrop of lower trend growth of earnings, incomes and consumption in the 1990s relative to the 1980s. In the second part of the paper we further analyze the differences between East and West Germans in terms of the evolution of levels and inequality of wages, income, and consumption.
This paper presents an empirical analysis of the importance of ‘comparison income’ for individual well-being or happiness. In other words, the influence of the income of a reference group on individual well-being is examined. The main novelty is that various hypotheses are tested: the importance of the own income, the relevance of the income of the reference group and of the distance between the own income and the income of the reference group, and most importantly the asymmetry of comparisons, i.e. the comparison income effect differing between rich and poor individuals. The analysis uses a self-reported measure of satisfaction with life as a measure of individual well-being. The data come from a large German panel known as GSOEP. The study concludes that the income of the reference group is about as important as the own income for individual happiness, that individuals are happier the larger their income is in comparison with the income of the reference group, and that for West Germany this comparison effect is asymmetric. This final result supports Dusenberry's idea that comparisons are mostly upwards.
Recent work suggests that a person’s subjective well-being (SWB) depends to a large degree on relative-income. Focusing on the underlying identification, this paper makes four contributions to this literature: it describes the aggregation problem with past studies, implements an estimation strategy to overcome this problem, finds micro-level evidence in support of the hypothesis that relative-income does matter in individual assessments of SWB, and uses cross-section estimates to replicate the aggregate time-series. The evidence further indicates that relative-income effects may be smaller at low income levels. The results are obtained from ordered probit techniques and the general social survey (GSS).
This paper presents an analysis of the trends in inequality across income, earnings and consumption in Britain since 1978. It documents the episodic nature of inequality growth over this period largely dominated by the inequality ‘boom’ in earnings inequality of the 1980s. It builds a consistent picture across these key measures of inequality to provide a coherent link between the microeconomic and macroeconomic analysis of the evolution of inequality.
This paper presents stylized facts on labor supply, income, consumption, wealth, and several measures of consumption and income inequality drawn from the 1980–2006 Survey of Household Income and Wealth (SHIW) conducted by the Bank of Italy. The SHIW provides information on consumption, income and wealth, and a sizable panel component that allows econometricians to estimate sophisticated income, consumption, and wealth processes and to analyze labor market and portfolio transitions. We find that over the sample period income inequality is higher and has grown faster than consumption inequality. Most of the increase in income inequality is related to an increase in the degree of earnings' instability rather than to shifts in the wage structure. We suggest that, in particular, the labor market reforms of the 1990s and 2000s are the most plausible explanation of the increased earnings inequality.
We document a clear increase in Swedish earnings inequality in the early 1990s, and that much of this increase was generated by movements in and out of the labor market. Inequality in disposable income and earnings net of taxes and transfers also increased, but much less than the increased inequality in pre-government earnings. These different developments are most likely explained by the generous Swedish welfare system. Consistent with these observations, we see no clear trend in consumption inequality.We also estimate stochastic processes for household earnings. A simple random-walk process captures much of the life-cycle dynamics. But we find clear evidence that the true earnings process is not a random walk. We demonstrate that some estimation methods result in severe upward bias in the estimated volatility of permanent shocks if serial correlation in temporary shocks is ignored.Our estimation results show that the increase in earnings inequality is almost entirely driven by an increase in residual earnings inequality. Moreover, this increase was mostly generated by an increased volatility of persistent shocks.
The paper addresses the question whether utility may be viewed as a completely relative concept. In a dynamic setting this means that one has to model both habit formation and utility interdependence. The resulting model contains unobservable variables and requires panel data to be estimated. Using the first two waves of an annual panel in The Netherlands, different specifications of the model are estimated, involving alternative sets of identifying restrictions. It turns out that the data are compatible with the hypothesis that utility is completely relative, but we cannot exclude the possibility that utility is partly relative and partly absolute.
This paper investigates whether individuals feel worse off when others around them earn more. In other words, do people care about relative position, and does "lagging behind the Joneses" diminish well-being? To answer this question, I match individual-level data containing various indicators of well-being to information about local average earnings. I find that, controlling for an individual's own income, higher earnings of neighbors are associated with lower levels of self-reported happiness. The data's panel nature and rich set of measures of well-being and behavior indicate that this association is not driven by selection or by changes in the way people define happiness. There is suggestive evidence that the negative effect of increases in neighbors' earnings on own well-being is most likely caused by interpersonal preferences, that is, people having utility functions that depend on relative consumption in addition to absolute consumption. © 2005 MIT Press
After the introduction in Section 2, we very briefly sketch out current theoretical and empirical developments in the social sciences. In our view, they all point in the same direction: toward the acute and increasing need for multidisciplinary longitudinal data covering a wide range of living conditions and based on a multitude of variables from the social sciences for both theoretical investigation and the evaluation of policy measures. Cohort and panel studies are therefore called upon to become truly interdisciplinary tools. In Section 3, we describe the German Socio-Economic Panel Study (SOEP), in which we discuss recent improvements of that study which approach this ideal and point out existing shortcomings. Section 4 concludes with a discussion of potential future issues and developments for SOEP and other household panel studies.
The theoretical model of Gaertner (1974) and Pollak (1976) for the interdependence of preferences in the Linear Expenditure System is estimated for a cross-section of households. The interdependence of consumption of different households has implications for the stochastic structure of the model and for the identifiability of its parameters. Both aspects are dealt with. The empirical results indicate a significant role played by the interdependence of preferences. One of its implications is that predictions of the effects of changes in a household's exogenous variables differ according to whether the exogenous variable only changes for this household or for all households jointly. © 1997 John Wiley & Sons, Ltd.
Today, as in the past, within a country at a given time those with higher incomes are, on average, happier. However, raising the incomes of all does not increase the happiness of all. This is because the material norms on which judgments of well-being are based increase in the same proportion as the actual income of the society. These conclusions are suggested by data on reported happiness, material norms, and income collected in surveys in a number of countries over the past half century.
This paper tests for the presence of habit formation using household data. A simple model of habit formation implies a condition relating the strength of habits to the evolution of consumption over time. When the condition is estimated with food consumption data from the Panel Study on Income Dynamics (PSID), the results yield no evidence of habit formation at the annual frequency. This finding is robust to a number of changes in the specification. It also holds for several proxies for nondurables and services consumption created by combining PSID variables with weights estimated from Consumer Expenditure Survey data.
In this short paper we take a first look at the question of whether the increasing income inequality that the US has witnessed in the past 25 years has generated increasing unhappiness in those who have been falling behind, despite their real income has risen markedly. If an individual's utility depends not only on the level of her own consumption but also on how that level compares with the consumption of others, then the observed widening of the income distribution may have implications for the happiness of different groups that go beyond those associated with the changes in their respective incomes. We find that people's happiness appears to depend positively on how well their socio-economic group is doing relative to the average in their geographic area, even after controlling for the level of their own income. In addition, we find some evidence that the relationship is much stronger for people whose group has above-average income than for people whose group has below-average income; it would thus appear that relative concerns do not become an issue until a person has attained a certain place within the income distribution.
Income Inequality and Saving. Discussion Paper 7083 Envy and Habits: Panel Data Estimates of Interdependent Preferences. Banco de Espana Working Papers 1213
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Alvarez-Cuadrado, F., El-Attar Vilalta, M., 2012. Income Inequality and Saving. Discussion Paper 7083, IZA. Alvarez-Cuadrado, F., Casado, J.M., Labeaga, J.M., Sutthiphisal, D., 2012. Envy and Habits: Panel Data Estimates of Interdependent Preferences. Banco de Espana Working Papers 1213. Banco de Espana. Bach, S., Corneo, G., Steiner, V., 2009. From bottom to top: the entire income distribution in Germany, 1992–2003.
Zur Erfassung von Einkommen und Vermögen in Haushaltssurveys: Hocheinkom-mensstichprobe und Vermögensbilanz im SOEP. Data Documentation 19 Inequality trends for Germany in the last two decades: a tale of two countries
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Frick, J.R., Goebel, J., Grabka, M.M., Groh-Samberg, O., Wagner, G.G., 2007. Zur Erfassung von Einkommen und Vermögen in Haushaltssurveys: Hocheinkom-mensstichprobe und Vermögensbilanz im SOEP. Data Documentation 19. Deutsches Institut für Wirtschaftsforschung. Fuchs-Schuendeln, N., Krueger, D., Sommer, M., 2010. Inequality trends for Germany in the last two decades: a tale of two countries. Rev. Econ. Dyn. 13 (1), 103–132.
Inequality and Instability: A Study of the World Economy Just Before the Great Crisis A test of conspicuous consumption: visibility and income elasticities
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Fault Lines: How Hidden Fractures Still Threaten the World Economy Habit Formation and Keeping Up With the Joneses: Evidence from Micro Data, mimeo, Available at SSRN: http://ssrn Is more always better?: A survey on positional concerns
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