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Title:A permanent income version of the relative income hypothesis PDF Logo
Authors:Alvarez-Cuadrado, Francisco
van Long, Ngo
Issue Date:2008
Series/Report no.:CESifo working paper 2361
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.
Subjects:Relative consumption
relative income hypothesis
permanent income
JEL:H21
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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