Working Papers in Economics,
University of Gothenburg, Department of Economics

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

JEL-codes: D91; E21

16 pages, September 22, 2006

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Fredrik W. Andersson, (2009), 'Consumption Theory with Reference Dependent Utility', Journal of Socio-Economics, vol 38, no 3, pages 415-420

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