Keeping Up or Catching Up? Income Inequality, Social Comparisons, and the Shape of Expenditure Cascades

The shape of expenditure cascades has important implications for macro- and ecological economics, as it helps us to understand the transmission process from policies affecting inequality to changes in total consumption volumes. The expenditure cascades hypothesis, that income gains at the top of the income distribution lead to greater expenditures throughout the distribution, is typically built on upward-looking social comparisons, the idea that individuals only compare themselves to those with higher income (consumption) than themselves. However, this assumption is unnecessary and insufficiently justified in the literature. In this paper I propose an agent-based model of consumption decisions, which employs a novel method of integrating the consumption reference into the utility function. Using this model, I demonstrate that expenditure cascades can occur in the microeconomic sense without the upward-looking assumption, but that dropping the assumption can reverse the direction of the effect of inequality on the aggregate savings rate. The model offers a new theoretical perspective on the ambiguous empirical evidence in this area