It is well established in economic literature, from Kuznets (1953) to Dynan et
al. (2004), that the rich save a larger share of their income. In this study, I use
Chinese household survey data to show that not only do the rich save more, but
wealth, or richness, is not absolute, and is perceived relative to local average income
levels. That is, households in high average income locations are likely to consume
more of their disposable income, ceteris paribus. Using city identifiers, I estimate local
average income, and construct a given household’s relative income as the ratio of the
household’s income over the local average. I then demonstrate that the household’s
saving rate is more closely correlated to its relative income than to its absolute income.
I am able to show this both for household reported income and, using education as
an instrument, for the household permanent income / lifetime wealth.