The nexus between debt and inequality has attracted considerable scholarly attention in the wake of the global financial crisis. One prominent candidate to explain the striking co-evolution of income inequality and private debt in this period has been the theory of upward-looking consumption externalities leading to expenditure cascades. We propose a parsimonious model of upward-looking consumption at the micro-level mediated by perception networks with empirically plausible topologies. This allows us to make sense of the ambiguous empirical literature on the relevance of this channel. Our model, based purely on current income, replicates the major stylised facts regarding micro consumption behaviour and is thus observationally equivalent to the workhorse permanent income hypothesis, without facing its dual problem of “excess smoothness” and “excess sensitivity”. We also demonstrate that the network topology and segregation has a significant effect on consumption patterns which has so far been neglected.
A Network Approach to Expenditure Cascades
Daniel Mayerhoffer’s contribution was funded by the Deutsche Forschungsgemeinschaft (DFG, German Research Foundation) – 430621735. Furthermore, financial support for the paper by the University of Bamberg through the Fres(c)h grant no. 06999902 is gratefully acknowledged. We would also like to express our gratitude to Yunus Aksoy, Jan Behringer, Domenico Delli Gatti, Anna Gebhard, Bettina Gregg, Gabriel Lozada, Özlem Onaran, Benjamin Tippet, Jan Weber, Rafael Wildauer and the participants of the research colloquium at the University of Utah as well as the 12th Annual PhD Student Conference of the Post-Keynesian Economics Society, especially to our designated discussant Eugenio Caverzasi, the participants of the 25th conference of the Foundation for Macroeconomics and Macroeconomic Policies in Berlin, of the First Philosophy and Economics Conference in Vienna, of the Workshop on Economics with Heterogeneous Interacting Agents 2021, of the Networks in a Globalized Work Conference 2022 and of the Annual Conference of the European Association for Evolutionary Political Economy in Naples for many helpful comments and suggestions that greatly improved our paper and sharpened our focus. We are especially honoured to have received the Herbert Simon Prize 2022 for this paper by the European Association for Evolutionary Political Economy that was an immense help in gaining exposure and additional valuable feedback for our approach. We also thank one anonymous reviewer and the editor Morris Altman for their comments and excellent peer-review. Finally, we also thank Marton Gera, Carsten Källner and Marius Theiler for their able research assistance. All remaining errors are, of course, ours.
Schulz J, Mayerhoffer DM (2023), "A Network Approach to Expenditure Cascades". Review of Behavioral Economics, Vol. 10 No. 3 pp. 229–262, doi: https://doi.org/10.1561/105.00000174
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