Home > Terms > English, UK (UE) > Relative income hypothesis

People often care more about their relative well being than their absolute well being. Someone who prefers a $100 a week pay rise when a colleague gets $50 to both of them getting a $200 increase, for example. Poor people may consume more of their income than rich people do because they want to reduce the gap in their consumption levels. The relative income hypothesis, set out by James Duesenberry, says that a household's consumption depends partly on its income relative to other families. Contrast with permanent income hypothesis.