Rereading a theory: Does the income level of countries affect the consumer behavior?

Abstract

This study examines how income levels influence consumer behavior, particularly through the lens of Duesenberry’s relative income and ratchet effect hypotheses. Duesenberry's "ratchet effect" refers to the tendency for individuals to maintain their consumption levels at a higher level once they have reached a certain standard of living, even when their income falls, meaning they are less likely to cut back on spending significantly during economic downturns, similar to how a ratchet only allows movement in one direction; once consumption increases, it is difficult to reverse it downwards easily. The ratchet effect suggests that consumers are resistant to reducing their consumption levels despite decreases in income, as past consumption serves as a psychological baseline. We analyze these hypotheses across two distinct groups: middle-income countries (Brazil, Senegal, Kenya, Jordan) and high-income countries (Japan, Germany, Sweden, Belgium). Using time series data from 1970 to 2020, we employ an Autoregressive Distributed Lag (ARDL) model along with panel data regression to analyze 20 middle-income and 20 high-income countries from 1980 to 2018.  Our findings confirm the ratchet effect in middle-income countries, where consumption patterns are strongly influenced by prior income levels, suggesting a persistent upward consumption bias even during economic downturns. However, in high-income countries, the ratchet effect exhibits inconsistent applicability, potentially due to higher income stability, stronger safety nets, and differing consumer priorities. These discrepancies highlight the varied behavioral responses to economic fluctuations based on income levels and societal norms.