An Empirical Investigation of Consumption Function under Relative Income Hypothesis: Evidence from Farm Households in Northern Pakistan

The main objective of this research was to empirically investigate the relationship between income and consumption of farm households in District Peshawar, Khyber Pakhtunkhwa province of Pakistan. For this purpose, a household level survey was conducted in summer 2012 in two selected villages, namely Tarnab and Akbarpura. Out of the total 3244 households, a sample of 300 households was randomly selected. The study found that household current level of income, family size, education of household head, and social status were the significant determinants contributing positively to household consumption. Only age of household head was negatively related to household consumption. The results of the study confirms that farm households follow Dusenberry’s relative income hypothesis and that household consumption is not only affected by household current level of income but by the highest level of income previously attained as well as the consumption patterns of other households.