Income Distribution, Consumer Debt and Keeping up with the Joneses

Abstract

We extend Kaldor's theory of income distribution to include workers' debt accumulation and their motive to emulate rentiers' consumption. Our results show that (i) the interaction between income distribution and emulation can produce instability; (ii) instability is more likely when the workers' emulation motive is strong and bankers' lending decisions are highly accommodating; and (iii) a plausible assumption on the non-linearity of emulation behavior can generate a limit cycle. Our analysis provides an alternative perspective on the increase in household indebtedness for the decades before the recent crisis and the subsequent deleveraging process.

Expenditure Cascades, Low Interest Rates or Property Booms? Determinants of Household Debt in OECD Countries

“…Kumhof et al (2012) have proposed a two-class DSGE model where poor households are pushed into debt as they are trying to maintain their consumption levels. Several authors (Frank et al 2014;Kapeller & Schütz 2014;Ryoo & Kim 2014;Behringer & Treeck 2013) have argued that rapidly growing top incomes lead to rising household debt if consumers follow social norms and imitate the lifestyle and expenses of richer peers. This latter argument is based on a behavioural economics approach, in particular otherregarding social norms for which there exists empirical support especially in the context of consumption and saving (Alvarez-Cuadrado & Japaridze 2017; Kim et al 2015;Drechsel-Grau & Schmid 2014).…”

“…The result is a cascade of debt-financed status expenditures flowing downwards from the top of the income distribution; thus we use the term expenditure cascades hypothesis (ECH). Several authors have incorporated these assumptions in Post Keynesian macroeconomic models (Belabed et al 2013;Kapeller & Schütz 2014;Ryoo & Kim 2014;Cardaci 2014). A similar explanation of increased household borrowing posits that households (building on prospect theory) do not want to reduce consumption below levels reached in the past or below a minimum level.…”

The Macroeconomic Implications of Consumption: State-of-Art and Prospects for the Heterodox Future Research

“…Duenseberry and/or Veblen's ideas were recovered to deal with escalating household consumption, despite stagnant labor income. Conspicuous consumption and emulation effect were included in many models to explain debt-led consumption dynamics (BARBA; PIVETTI, 2009;KIM, 2012;VAN TREECK, 2012;RYOO;KIM;MEI., 2013;KAPELLER;SCHUTZ, 2014a;2014b).…”

“…For instance, in some models, workers do not hold assets Ryoo and Kim (2013), Dutt (2006), and changes in asset prices and default are ruled out Dutt (2006). Another example is found in Ryoo and Kim (2013), where rentier's portfolio preferences are given and this rules out a source of instability, as endogenous changes in portfolio choices can generate instability and cycles and compose a central part of some approaches of Minsky's financial instability hypothesis. At last, Kim, Setterfield and Mei (2013) consider the wealth effects on aggregate consumption are modest and that rentiers do not consume.…”

“…Workers and profit earners have, respectively, a target wage share and profit share, and both react to the discrepancy between the actual and the desired income share, which may lead to wage inflation, according to the bargaining power of each group. Ryoo and Kim (2013) consider that income distribution changes endogenously to eliminate the excess demand or supply. 12 12 Godley and Lavoie (2007) assume that firms make price decisions based on normal cost-pricing, instead of mark-up pricing.…”