Scandinavian Working Papers in Economics
Working Papers in Economics,
University of Gothenburg, Department of Economics
No 226: Consumption Theory with Reference Dependent Utility
Fredrik W. Andersson ()
Additional contact information
Fredrik W. Andersson: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: Box 640, SE 405 30 GÖTEBORG
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.
Keywords: Consumption decision; consumption of relevant others; habit- formation behavior; marginal propensity to consume; excess smoothness
16 pages, September 22, 2006
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