Please use this identifier to cite or link to this item:
Alvarez-Cuadrado, Francisco
van Long, Ngo
Year of Publication: 
Series/Report no.: 
CESifo working paper 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.
Relative consumption
relative income hypothesis
permanent income
Document Type: 
Working Paper

Files in This Item:
238.47 kB

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.