Review of Behavioral Economics > Vol 1 > Issue 1–2

Expenditure Cascades

Robert H. Frank, H. J. Louis Professor of Management and Professor of Economics, Johnson Graduate School of Management, Cornell University, USA, rhf3@cornell.edu Adam Seth Levine, Department of Government, Cornell University, USA, ASL22@cornell.edu Oege Dijk, Radboud University Nijmegen, Institute for Management Research, The Netherlands, o.dijk@fm.ru.nl
 
Suggested Citation
Robert H. Frank, Adam Seth Levine and Oege Dijk (2014), "Expenditure Cascades", Review of Behavioral Economics: Vol. 1: No. 1–2, pp 55-73. http://dx.doi.org/10.1561/105.00000003

Published: 15 Jan 2014
© 2014 R. H. Frank, A. S. Levine and O. Dijk
 
Subjects
Labor Economics
 

Article Help

Share

Login to download a free copy
In this article:
1. Expenditure Cascades
2. An Illustrative Model
3. Changing Patterns of Income Growth
4. Three Specific Hypotheses
5. Empirical Results
6. Discussion
References

Abstract

Prevailing economic models of consumer behavior completely ignore the well-documented link between context and evaluation. We propose and test a theory that explicitly incorporates this link. Changes in one group's spending shift the frame of reference that defines consumption standards for others just below them on the income scale, giving rise to expenditure cascades. Our model, a descendant of James Duesenberry's relative income hypothesis, predicts the observed ways in which individual savings rates respond to changes in both own and others' permanent income, as well as numerous other stylized fact patterns that are difficult to reconcile with prevailing models.

DOI:10.1561/105.00000003