In this article, we specify the conceptual space of an individual difference variable--sensitivity of consumption to current income. Our purposes are to describe this conceptual variable, distinguish it conceptually from related constructs, and outline a theoretical framework that links the construct to pay preferences and reactions to different types of pay schemes.
We aim to broaden and extend this literature by elaborating on the sensitivity of consumption to current income variable and placing it conceptually within a nomological network related to compensation administration.
The development of the sensitivity of consumption to current income construct can be traced to two influential economic theories, life cycle theory, for which Franco Modigliani received the Nobel Prize in economics, and Friedman's (1957) "permanent income hypothesis." Both theories propose that spending is relatively constant over the course of life because an individual will spend as a constant proportion of average expected income.
The accumulated empirical evidence led researchers to explore the possibility that stable individual differences exist with regard to the propensity to consume current income (e.g., Flavin, 1981).
Income sensitive consumers and permanent income consumers both desire and expect rising incomes, but only in the case of income sensitive consumers is spending level tied directly to current income. Individuals whose consumption is more income sensitive will increase their spending levels immediately after receiving an increase in pay.
Materialism and the meaning of money, however, do receive some conceptual attention and should be distinguished from sensitivity of consumption to current income.
Because materialists place a higher emphasis on consumption, these findings suggest that materialism would be positively related to the sensitivity of consumption to current income construct.
Of these facets, money management is the most closely related conceptually to sensitivity of consumption to current income, but there are several conceptual differences between them.
SENSITIVITY OF CONSUMPTION TO CURRENT INCOME AND COMPENSATION PREFERENCES
In this section, we identify ways that sensitivity of consumption to current income can be expected to relate to reward preferences.