Do quality ladders rationalise the observed Engel curves?

Merella, Vincenzo

2014-01-01

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Abstract

Observed Engel curves are non-monotonic, hence consumption goods may be regarded as luxuries only for ranges of consumer income. This paper rationalises this evidence by postulating that quality of consumption governs the distribution of spending across goods. We argue that quality upgrading as income increases not only implies that virtually every variety of each good eventually becomes inferior. But also amends the notion of luxury good: a change in income, producing different quality variations across goods, causes heterogeneous spending responses. The resulting Engel curves shapes depend on the rise in quality of each good relative to the average consumption quality improvement. An illustrative simulation shows that the model captures the essential features of the observed Engel curves.