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 1% increase in reference consumption leads households to raise own consumption by about 0.3%. 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 18euros. Our findings establish an important microeconomic link between changing income inequality and aggregate consumption.