Relativity, Rank and the Utility of Income

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Relativity, Rank and the Utility of Income

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MatthewD. Rablen

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Matthew D. Rablen

Abstract

Relative utility has become an important concept in several disjoint areas of economics. I present a cardinal model of income utility based on the supposition that agents care about their rank in the income distribution and that utility is subject to adaptation over time. Utility levels correspond to the Leyden Individual Welfare Function while utility differences yield a version of the prospect theory value function, thereby providing a new and shared derivation of each. I offer an explanation of some long-standing paradoxes in the wellbeing literature and an insight into the links between relative comparisons and loss aversion. Copyright © 2008 The Author(s).

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 118 (2008)
Issue (Month): 528 (04)
Pages: 801-821
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Handle: RePEc:ecj:econjl:v:118:y:2008:i:528:p:801-821

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Kapteyn, A. & Kleinjans, K. & Soest, A.H.O. van, 2008. "Intertemporal Consumption with Directly Measured Welfare Functions and Subjective Expectations," Discussion Paper 2008-85, Tilburg University, Center for Economic Research. [Downloadable!]
Other versions:
- Arie Kapteyn & Kristin J. Kleinjans & Arthur Van Soest, 2007. "Intertemporal Consumption with Directly Measured Welfare Functions and Subjective Expectations," Working Papers 535, RAND Corporation Publications Department. [Downloadable!]
Steven Carter & Michael McBride, 2009. "Experienced Utility versus Decision Utility: Putting the 'S' in Satisfaction," Working Papers 080925, University of California-Irvine, Department of Economics. [Downloadable!]
Luis Angeles, 2008. "Adaption or social comparison? The effects of income on happiness," Working Papers 2009_09, Department of Economics, University of Glasgow, revised Jun 2009. [Downloadable!]
Matthew D. Rablen & Andrew J. Oswald, 2007. "Mortality and Immortality," IZA Discussion Papers 2560, Institute for the Study of Labor (IZA). [Downloadable!]
Other versions:
- Rablen, Matthew D. & Oswald, Andrew J., 2007. "Mortality and Immortality," The Warwick Economics Research Paper Series (TWERPS) 785, University of Warwick, Department of Economics. [Downloadable!]

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