Using a unique dataset we study both the actual and self-perceived relationship between subjectivewell-being and income comparisons against a wide range of potential comparison groups, enabling usto investigate a broader range of questions than in previous studies. In questions inserted into a 2008module of the German-Socio Economic Panel Study we ask subjects to report (a) how their incomecompares to various groups, such a co-workers, friends, and neighbours, and (b) how important theseincome comparisons are to them. We find substantial gender differences, with income comparisonsbeing much better predictors of subjective well-being in men than in women. Generic (same-gender)comparisons are the most important, followed by within profession comparisons. Once generic andwithin-profession comparisons are controlled for, income relative to neighbours has a negativecoefficient, implying that living in a high-income neighbourhood increases happiness. The perceivedimportance of income comparisons is found to be uncorrelated with its actual relationship tosubjective well-being, suggesting that people are unconscious of its real impact. Subjects who judgecomparisons to be important are, however, significantly less happy than subjects who see incomecomparisons as unimportant. Finally, the marginal effect of relative income on subjective well-beingdoes not depend on whether a subject is below or above the reference group income.
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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number
dp0938.
Find related papers by JEL classification: D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution D62 - Microeconomics - - Welfare Economics - - - Externalities D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement I3 - Health, Education, and Welfare - - Welfare and Poverty I31 - Health, Education, and Welfare - - Welfare and Poverty - - - General Welfare Z13 - Other Special Topics - - Cultural Economics - - - Social Norms and Social Capital; Social Networks Economic Anthropology
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Richard Layard & Guy Mayraz & Stephen J. Nickell, 2007.
"The Marginal Utility of Income,"
SOEPpapers
50, DIW Berlin, The German Socio-Economic Panel (SOEP).
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