Relative income hypothesis

The relative income hypothesis was developed by James Duesenberry and states that an individual's attitude to consumption and saving is dictated more by his income in relation to others than by abstract standard of living. The percentage of income consumed by an individual depends on his percentile position within the income distribution.

It also hypothesizes that the present consumption is influenced not merely by present levels of absolute and relative income but also by levels of consumption attained in a previous period. It is difficult for a family to reduce a level of consumption once it is attained. The aggregate ratio of consumption to income is assumed to depend on the level of present income relative to past peak income.