Two Essays on Relative Consumption

Abstract: First paper: Consumption Theory with Reference Dependent Utility: Its Impact on Marginal Propensity to Consume This paper presents a closed form consumption function for an individual when he derives utility from his own previous and current consumption and from the previous consumption of his relevant others. I show that the individual's marginal propensity to consume (MPC) is smaller than the MPC under the permanent income hypothesis. On the other hand, the individuals' MPC is larger than if he merely has a habit-formation behavior, as in Alessie and Lusardi (1997). This model implies that the individuals' consumption change is less sensitive to an increase in his permanent income than in the Hall (1978) and Alessie and Lusardi (1997) models. Second paper: Is Concern for Relative Consumption a Function of Relative Consumption? By using hypothetical choice experiments, this paper presents evidence that individuals' concern for relative consumption depends on their relative consumption. Individuals with consumption levels above society's average consumption level tend to have, in general, lower concern for relative consumption. This supports Duesenberry's (1949) notion that people are more concerned with upward social comparison than with downward social comparison.