Was Duesenberry Right? A Behavioral Analysis

Abstract

Behavioral scientists agree on the role of context on decisions (evaluation). In contrast, traditional consumption models assume that the preferences and expenditures of different consumers are independent. This study develops a simplified version of the Expenditure cascade model, a variant of the Relative income hypothesis, to establish and test the claim that spending behavior is influenced by contextual factors like income distribution. This simple model implies that the average propensity to consume (APC) evolves with changes in income distribution. Empirical results show that over the period 1947-2021, the APC in the United States moves together (“jointly”) with changes in income distribution, consistent with theoretical expectations.