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Consumption Theory with Reference Dependent Utility

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  • Andersson, Fredrik W.

    (Department of Economics, School of Business, Economics and Law, Göteborg University)

Abstract

This paper presents a closed form consumption function for an individual when he derives utility from both his current and previous consumption and from the consumption of his relevant others. I show that the traditional definition of an individual's marginal propensity to consume (MPC) is too narrow. With existing knowledge we would call for a broader definition of the MPC that I coin as the individual's total MPC, which also takes into account the consumption change of the relevant others, and this affects that total MPC is smaller than the traditional MPC.

Suggested Citation

  • Andersson, Fredrik W., 2006. "Consumption Theory with Reference Dependent Utility," Working Papers in Economics 226, University of Gothenburg, Department of Economics.
    • Handle: RePEc:hhs:gunwpe:0226
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    File URL: http://hdl.handle.net/2077/2718
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    References listed on IDEAS

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    7. Andersson, Fredrik W., 2006. "Is Concern for Relative Consumption a Function of Relative Consumption?," Working Papers in Economics 220, University of Gothenburg, Department of Economics.
    8. Alpizar, Francisco & Carlsson, Fredrik & Johansson-Stenman, Olof, 2005. "How much do we care about absolute versus relative income and consumption?," Journal of Economic Behavior & Organization, Elsevier, vol. 56(3), pages 405-421, March.
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    More about this item

    Keywords

    Consumption decision; consumption of relevant others; habit- formation behavior; marginal propensity to consume; excess smoothness;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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