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So Far so Good: Age, Happiness, and Relative Income

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  • Felix R. FitzRoy
  • Michael A. Nolan
  • Max F. Steinhardt
  • David Ulph

Abstract

In a simple 2-period model of relative income under uncertainty, higher comparison income for the younger cohort can signal higher or lower expected lifetime relative income, and hence either increase or decrease well-being. With data from the German Socio-Economic Panel and the British Household Panel Survey, we first confirm the standard negative effects of comparison income on life satisfaction with all age groups, and many controls. However when we split the West German sample by age we find a positive significant effect of comparison income in the under 45s, and the usual negative effect only in the over 45 group. With the same split in UK and East German data, comparison income loses significance, which is consistent with the model prediction for the younger group. Our results provide first evidence that the standard aggregation with only a quadratic control for age can obscure major differences in the effects of relative income.

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Bibliographic Info

Paper provided by DIW Berlin, The German Socio-Economic Panel (SOEP) in its series SOEPpapers on Multidisciplinary Panel Data Research with number 415.

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Length: 27 p.
Date of creation: 2011
Date of revision:
Handle: RePEc:diw:diwsop:diw_sp415

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Keywords: Subjective life-satisfaction; comparison income; reference groups; age; welfare;

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References

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  1. Clark, Andrew E. & Frijters, Paul & Shields, Michael A., 2007. "Relative Income, Happiness and Utility: An Explanation for the Easterlin Paradox and Other Puzzles," IZA Discussion Papers 2840, Institute for the Study of Labor (IZA).
  2. Senik, Claudia, 2004. "When information dominates comparison: Learning from Russian subjective panel data," Journal of Public Economics, Elsevier, Elsevier, vol. 88(9-10), pages 2099-2123, August.
  3. Ada Ferrer-i-Carbonell & Paul Frijters, 2002. "How important is Methodology for the Estimates of the Determinants of Happiness?," Tinbergen Institute Discussion Papers, Tinbergen Institute 02-024/3, Tinbergen Institute.
  4. Drichoutis, Andreas C. & Nayga Jr., Rodolfo M. & Lazaridis, Panagiotis, 2010. "Do reference values matter? Some notes and extensions on "income and happiness across Europe"," Journal of Economic Psychology, Elsevier, Elsevier, vol. 31(4), pages 479-486, August.
  5. Richard Layard & Guy Mayraz & Stephen Nickell, 2009. "Does Relative Income Matter? Are the Critics Right?," CEP Discussion Papers, Centre for Economic Performance, LSE dp0918, Centre for Economic Performance, LSE.
  6. Claudia Senik, 2007. "Ambition and jealousy. Income interactions in the "Old" Europe versus the "New" Europe and the United States," PSE Working Papers, HAL halshs-00590828, HAL.
  7. Ferrer-i-Carbonell, Ada, 2005. "Income and well-being: an empirical analysis of the comparison income effect," Journal of Public Economics, Elsevier, Elsevier, vol. 89(5-6), pages 997-1019, June.
  8. AndrewE. Clark & Nicolai Kristensen & Niels Westergård-Nielsen, 2009. "Job Satisfaction and Co-worker Wages: Status or Signal?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 119(536), pages 430-447, 03.
  9. Andrew E. Clark and Andrew J. Oswald, . "Satisfaction and Comparison Income," Economics Discussion Papers, University of Essex, Department of Economics 419, University of Essex, Department of Economics.
  10. Hirschman, Albert O., 1973. "The changing tolerance for income inequality in the course of economic development," World Development, Elsevier, Elsevier, vol. 1(12), pages 29-36, December.
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  12. Blanchflower, David G. & Oswald, Andrew J., 2007. "Is Well-Being U-Shaped over the Life Cycle?," IZA Discussion Papers 3075, Institute for the Study of Labor (IZA).
  13. Gert G. Wagner & Joachim R. Frick & Jürgen Schupp, 2007. "The German Socio-Economic Panel Study (SOEP) – Scope, Evolution and Enhancements," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, Duncker & Humblot, Berlin, vol. 127(1), pages 139-169.
  14. Fliessbach, Klaus & Weber, Bernd & Trautner, P. & Dohmen, Thomas J. & Sunde, Uwe & Elger, C. E. & Falk, Armin, 2007. "Social comparison affects reward-related brain activity in the human ventral striatum," Munich Reprints in Economics, University of Munich, Department of Economics 20362, University of Munich, Department of Economics.
  15. Veblen, Thorstein, 1899. "The Theory of the Leisure Class," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, McMaster University Archive for the History of Economic Thought, number veblen1899.
  16. Thorstein Veblen, 1899. "Mr. Cummings's Strictures on "The Theory of the Leisure Class"," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 8, pages 106.
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Cited by:
  1. Felix FitzRoy & Michael Nolan & Max Steinhardt & David Ulph, 2013. "Testing the Tunnel Effect: Comparison, Age and Happiness in UK and German Panels," Discussion Paper Series, Department of Economics, Department of Economics, University of St. Andrews 201304, Department of Economics, University of St. Andrews.
  2. Laszlo Goerke & Markus Pannenberg, 2013. "Direct Evidence on Income Comparisons and Subjective Well-Being," IAAEU Discussion Papers, Institute of Labour Law and Industrial Relations in the European Union (IAAEU) 201303, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).
  3. Chrostek, Pawel, 2013. "An empirical investigation into the determinants and persistence of different types of subjective well-being," MPRA Paper 48292, University Library of Munich, Germany.
  4. Chrostek, Pawel, 2013. "An empirical investigation into the determinants and persistence of happiness and life evaluation," MPRA Paper 50442, University Library of Munich, Germany.

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