Consumption-Savings Decisions Under Upward Looking Comparisons: Evidence from Germany, 2002-2011

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractIn this paper we demonstrate that interpersonal comparisons do not only influence people's level of utility but also lead to "keeping up with the Joneses"-behavior as reference consumption substantially affects households' consumption-savings decisions. By applying the insights from the literature on self-reported well-being to the analysis households' economic decisions, we estimate the causal effect of changes in reference consumption, defined as the consumption level of all households who are perceived to be richer, on households' savings and consumption. Using annual household data from the German Socio-Economic Panel (SOEP) for the years 2002 through 2011 allows us to control for various sources of unobserved heterogeneity. We find that when controlling for changes in own income, increases in reference consumption lead to lower savings and increased consumption as predicted by the Relative Income Hypothesis. Furthermore, households in the (upper) middle class of the income distribution are most strongly affected. An increase in reference consumption of 100 euros induces an average reduction of household savings of 10 to 25 euros depending on the household's position in the income distribution. The economic implications of such behavior are particularly helpful for understanding the link between changes in income inequality and developments in aggregate household savings and consumption. Our model attributes between 30 and 40 percent of the variation in changes of household savings to inequality changes. Keywords AbstractWe demonstrate that upwardly-looking comparisons induce "keeping up with the richer Joneses"-behaviour. Using data from the German SocioEconomic Panel, we estimate the causal effect of reference consumption, defined as the consumption level of all households who are perceived to be richer, on household savings and consumption. When controlling for own income as well as unobserved individual and local area heterogeneity, an increase in reference consumption of 100 euros leads to an increase in consumption of up to 25 euros depending on the households position in the income distribution. Our findings suggest that changing income inequality can have significant macroeconomic effects.

Savings and Consumption When Children Move Out

“…On the other hand, the SOEP does not directly collect consumption, forcing us to use the approximation procedure described above and leaving us 6 The SOEP question about savings reads: "Do you usually have an amount of money left over at the end of the month that you can save for larger purchases, emergency expenses or to acquire wealth?" (SOEP, 2007a, Household question form, question 52) 7 See, e.g., Drechsel-Grau and Schmid (2013) and Schwerdt (2005) for other SOEP papers, where consumption is constructed in a similar way.…”