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James Duesenberry as a practitioner of behavioral economics

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  • Ken McCormick

    (University of Northern Iowa)

Abstract

In 1949 James Duesenberry published "Income, saving and the theory of consumer behavior". His objective was to solve a puzzle presented by the macroeconomic data on consumption. To do so, he created the Relative Income Hypothesis. Duesenberry explicitly challenged the neoclassical assumption of independent consumer preferences and made use of ideas that are now common in behavioral economics: loss aversion, status quo bias, spotlight effects, herd behavior, and interdependent preferences. He also raised policy questions about the effect of redistributive taxes on national saving. To answer the questions he raised, we need empirical research by behavioral economists. Finally, the issue arises as to why the Relative Income Hypothesis has virtually disappeared from economics even though it is superior to the Permanent Income Hypothesis that replaced it.

Suggested Citation

  • Ken McCormick, 2018. "James Duesenberry as a practitioner of behavioral economics," Journal of Behavioral Economics for Policy, Society for the Advancement of Behavioral Economics (SABE), vol. 2(1), pages 13-18, March.
    • Handle: RePEc:beh:jbepv1:v:2:y:2018:i:1:p:13-18
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    References listed on IDEAS

    as
    1. Michael J. Boskin & Eytan Sheshinski, 1978. "Optimal Redistributive Taxation When Individual Welfare Depends upon Relative Income," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 92(4), pages 589-601.
    2. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    3. Samuelson, William & Zeckhauser, Richard, 1988. "Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
    4. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6, National Bureau of Economic Research, Inc.
    5. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    6. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1.
    7. Kockesen, Levent & Ok, Efe A. & Sethi, Rajiv, 2000. "Evolution of Interdependent Preferences in Aggregative Games," Games and Economic Behavior, Elsevier, vol. 31(2), pages 303-310, May.
    8. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 151-170, Summer.
    9. Focke, Florens & Maug, Ernst & Niessen-Ruenzi, Alexandra, 2017. "The impact of firm prestige on executive compensation," Journal of Financial Economics, Elsevier, vol. 123(2), pages 313-336.
    10. Ok, Efe A. & Vega-Redondo, Fernando, 2001. "On the Evolution of Individualistic Preferences: An Incomplete Information Scenario," Journal of Economic Theory, Elsevier, vol. 97(2), pages 231-254, April.
    11. Chao, Angela & Schor, Juliet B., 1998. "Empirical tests of status consumption: Evidence from women's cosmetics," Journal of Economic Psychology, Elsevier, vol. 19(1), pages 107-131, February.
    12. Ken McCormick, 1983. "Duesenberry and Veblen: The Demonstration Effect Revisited," Journal of Economic Issues, Taylor & Francis Journals, vol. 17(4), pages 1125-1129, December.
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    Cited by:

    1. Ebadi Esmaeil & Are Wasiu, 2023. "Reinvestigating the U.S. Consumption Function: A Nonlinear Autoregressive Distributed Lags Approach," Economics - The Open-Access, Open-Assessment Journal, De Gruyter, vol. 17(1), pages 1-22, January.
    2. Tazeb Bisset & Dagmawe Tenaw, 2022. "Keeping up with the Joneses: macro-evidence on the relevance of Duesenberry’s relative income hypothesis in Ethiopia," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 24(2), pages 549-564, December.

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    More about this item

    Keywords

    Duesenberry; Relative Income Hypothesis; independent preferences; saving;
    All these keywords.

    JEL classification:

    • B31 - Schools of Economic Thought and Methodology - - History of Economic Thought: Individuals - - - Individuals
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy

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