Consumption depends on income relative to a reference group rather than on absolute income, and falls stickily when income drops.
Duesenberry's 1949 hypothesis. Its distinctive prediction is the ratchet: consumption resists falling when income falls, because the reference point is one's own past standard rather than current means.
In practice
- A family whose income doubles adjusts its spending within a year and calls the new level normal by the second.
- A household that loses a fifth of its income cuts spending by far less in the first year, drawing on savings to protect a standard set by its own past.
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- Economics & Incentives
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- The theories behind every argument about money