Addendum to Engel's Law: The Dispersion of Household Spending and the Influence of Relative Income

As households get rich they consume both a wider variety and higher quality of goods and services. We uncover new empirical facts about how this tradeoff between quality and variety itself responds to rising income by empirically studying the dispersion of household spending across expenditure categories. Examining UK household spending data (1970-2001), we find evidence that household spending dispersion does not always rise as household income grows, as many have claimed. Rather the dispersion of household spending tends to saturate at an income level which broadly coincides with the point at which households begin to spend more on luxuries than on necessities. This saturation tendency is an important addendum to Engel's law and is consistent with evidence that rich households prefer high quality goods. Moreover, we find evidence that social comparisons affect patterns of spending diversity: households which are more wealthy than the average household in their region display a higher propensity to diversify their spending than households that possess the same level of (absolute) income but are less wealthy than the average household in their region.