Expenditure cascades
Expenditure cascades is an economic term coined by researcher
Example
During the late 1900s and early 2000s, income inequality in the United States rose dramatically, and expenditure cascades occurred.[3] During the 1980s, the income-tax structure was altered to favor top earners in regards to after-tax purchasing power.[3]
Positional externalities
Expenditure cascades employ positional
Robert H. Frank cites an experiment that shows people choose a world in which they own a larger home than everyone else, over having larger homes for everyone yet a smaller home than his neighbors. Frank concludes that people will give up absolute consumption in order to obtain a better relative position.[4] Expenditure cascades are triggered by consumption, especially conspicuous consumption, which are known as "consumption cascades". The consumption by the wealthy triggers increased spending in the class directly below them, and the chain continues down to the bottom of the income ladder. This is a dangerous reaction for those at the bottom who have little disposable income originally, and even less after they attempt to keep up with others' spending habits. This is an example of the social phenomenon "keeping up with the Joneses".[5]
Possible solutions to the problem of positional externalities
Frank suggests that a
The fact that Americans had a negative savings rate in 2005, further proves the need for incentives to save money rather than increasing relative spending.[4] The key to creating a genuine impact on spending and saving habits is the collective effort of everyone invested in the economy to cut back on spending. Should a deficit continue, the poor and middle classes will suffer disproportionately to the top earners.
References
- ISBN 9780231143646
- ^ Robert H. Frank (December 5, 2011). "Does Inequality Matter?". Slate.
- ^ a b Frank, Robert H.; Levine, Adam S. "Expenditure Cascades" (PDF). American Economic Association.
- ^ a b c d e f Frank, Robert H. (2003). "Are Positional Externalities Different From Other Externalities?" (PDF). Archived from the original (PDF) on 2008-05-17. Retrieved 2008-11-25.
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(help) - ISSN 1094-2939.
Frank, Robert E; Levine, Adam Seth; Dijk, Oege (2014). "Expenditure Cascades". Review of Behavioral Economics. 1 (1–2): 55–73.