Relative income hypothesis

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Developed by James Duesenberry, the relative income hypothesis states that individual’s attitude to consumption and saving is dictated more by his income in relation to others than by abstract standard of living. So an individual is less concerned with absolute level of consumption than by relative levels. The percentage of income consumed by an individual depends on his percentile position within the income distribution.

Secondly it hypothesises that the present consumption is not influenced merely by present levels of absolute and relative income, but also by levels of consumption attained in previous period. It is difficult for a family to reduce a level of consumption once attained. The aggregate ratio of consumption to income is assumed to depend on the level of present income relative to past peak income.

References

Duesenberry, J. S. Income, Saving and the Theory of Consumer Behaviour. Cambridge: Harvard University Press, 1949.

v t e Consumption

Topics	Consumption function Final consumption expenditure Instant gratification Intertemporal consumption Random walk hypothesis Autonomous consumption Induced consumption Conspicuous consumption

Theories	Absolute income hypothesis Life cycle hypothesis Permanent income hypothesis Random walk model of consumption Relative income hypothesis

Lists	List of largest consumer markets

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