Relative Income Hypothesis
- Dusenberry posited that consumer’s spending is influenced by relative income in comparison to peers.
- Consumption habits formed during higher income periods are difficult to change even when income declines.
- The influence of relative income positions fosters a propensity to maintain consumption patterns even when not financially justified.
Demonstration Effect
- Individuals are influenced by the consumption patterns of their neighbors, leading to ‘keeping up with the Joneses’.
- Spending to match neighbors’ consumption standards can lead to financial strain.
- Such behavior can have broader economic implications, particularly in less developed countries.
Duesenberry Ratchet Effect
- The ratchet effect focuses on the stickiness of consumption habits despite income fluctuations.
- Once habits form during high income times, they continue even if income drops.
- This can contribute to cyclical economic patterns without external drivers.
Implications for Less Developed Countries
- Less developed countries may face adverse balance of payments due to consumption patterns driven by demonstration effect.
- Such consumption behavior can prevent economic resources from being used optimally.
- Influence of global standards exacerbates the local economic disparities.
Psychological Insights
- Dusenberry effect aligns with psychological principles of social comparison theory.
- Psychological tendency for upward comparison impacts consumer satisfaction and financial decision making.
- Understanding these dynamics can offer insights into consumer behavior during economic policy formulation.
♠
Found a bug? Have some other thoughts on this tool? Let me know here →
