Advanced Search
MyIDEAS: Login to save this paper or follow this series

Neighbors as Negatives: Relative Earnings and Well-Being

Contents:

Author Info

  • Erzo F.P. Luttmer

Abstract

This paper investigates whether individuals feel worse off when others around them earn more. In other words, do people care about relative position and does lagging behind the Joneses' diminish well-being? To answer this question, I match individual-level panel data containing a number of indicators of well-being to information about local average earnings. I find that, controlling for an individual's own income, higher earnings of neighbors are associated with lower levels of self-reported happiness. The data's panel nature and rich set of measures of well-being and behavior indicate that this association is not driven by selection or by changes in the way people define happiness. There is suggestive evidence that the negative effect of increases in neighbors' earnings on own well-being is most likely caused by interpersonal preferences people having utility functions that depend on relative consumption in addition to absolute consumption.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w10667.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10667.

as in new window
Length:
Date of creation: Aug 2004
Date of revision:
Publication status: published as Luttmer, Erzo F. P. "Neighbors As Negatives: Relative Earnings And Well-Being," Quarterly Journal of Economics, 2005, v120(3,Aug), 963-1002.
Handle: RePEc:nbr:nberwo:10667

Note: PE
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. Gary S. Becker, 1974. "A Theory of Social Interactions," NBER Working Papers 0042, National Bureau of Economic Research, Inc.
  2. Gruber Jonathan H & Mullainathan Sendhil, 2005. "Do Cigarette Taxes Make Smokers Happier," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-45, July.
  3. Andrew E. Clark, 2003. "Unemployment as a Social Norm: Psychological Evidence from Panel Data," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 21(2), pages 289-322, April.
  4. Andrew B. Abel, . "Asset Prices Under Habit Formation and Catching Up With the Jones," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 1-90, Wharton School Rodney L. White Center for Financial Research.
  5. John Y. Campbell & John H. Cochrane, 1994. "By force of habit: a consumption-based explanation of aggregate stock market behavior," Working Papers 94-17, Federal Reserve Bank of Philadelphia.
  6. Christopher D. Carroll & Jody Overland & David N. Weil, 1997. "Comparison Utility in a Growth Model," NBER Working Papers 6138, National Bureau of Economic Research, Inc.
  7. Di Tella, Rafael & Alesina, Alberto & MacCulloch, Robert, 2004. "Inequality and Happiness: Are Europeans and Americans Different?," Scholarly Articles 4553007, Harvard University Department of Economics.
  8. Bernard M. S. van Praag & P. Frijters & Ada Ferrer-i-Carbonell, 2001. "The Anatomy of Subjective Well-Being," Discussion Papers of DIW Berlin 265, DIW Berlin, German Institute for Economic Research.
  9. Stutzer, Alois, 2004. "The role of income aspirations in individual happiness," Journal of Economic Behavior & Organization, Elsevier, vol. 54(1), pages 89-109, May.
  10. David G. Blanchflower & Andrew J. Oswald, 2000. "Well-Being Over Time in Britain and the USA," NBER Working Papers 7487, National Bureau of Economic Research, Inc.
  11. Gali, J., 1992. "Keeping Up with the Joneses: Consumption Externalities, Portfolio Choice and Asset Prices," Papers 92-22, Columbia - Graduate School of Business.
  12. Bruno S. Frey & Simon Luechinger & Alois Stutzer, . "Valuing Public Goods: The Life Satisfaction Approach," IEW - Working Papers 184, Institute for Empirical Research in Economics - University of Zurich.
  13. Ed Diener & Ed Sandvik & Larry Seidlitz & Marissa Diener, 1993. "The relationship between income and subjective well-being: Relative or absolute?," Social Indicators Research, Springer, vol. 28(3), pages 195-223, March.
  14. Loewenstein, George & O'Donoghue, Ted & Rabin, Matthew, 2002. "Projection Bias in Predicting Future Utility," Working Papers 02-11, Cornell University, Center for Analytic Economics.
  15. King, Jeffrey & Liebman, Jeffrey & Katz, Lawrence & Sanbonmatsu, Lisa, 2004. "Moving to Opportunity and Tranquility: Neighborhood Effects on Adult Economic Self-Sufficiency and Health from a Randomized Housing Voucher Experiment," Working Paper Series rwp04-035, Harvard University, John F. Kennedy School of Government.
  16. John A. Rizzo & Richard J. Zeckhauser, 2003. "Reference Incomes, Loss Aversion, and Physician Behavior," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 909-922, November.
  17. Lawrence Katz & Jeffrey R. Kling & B. Jeffrey Liebman & Lisa Sanbonmatsu, 2004. "Moving to Opportunity and Tranquility: Neighborhood Effects on Adult Economic Self-Sufficiency and Health From a Randomized Housing Voucher Experiment," Working Papers 860, Princeton University, Department of Economics, Industrial Relations Section..
  18. Ravallion, Martin & Lokshin, Michael, 2001. "Identifying Welfare Effects from Subjective Questions," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 68(271), pages 335-57, August.
  19. J. Solnick, Sara & Hemenway, David, 1998. "Is more always better?: A survey on positional concerns," Journal of Economic Behavior & Organization, Elsevier, vol. 37(3), pages 373-383, November.
  20. Alois Stutzer & Rafael Lalive, . "The Role of Social Work Norms in Job Searching and Subjective Well-Being," IEW - Working Papers 051, Institute for Empirical Research in Economics - University of Zurich.
  21. Bernard M.S. van Praag & Paul Frijters, 1999. "The measurement of welfare and well-being; the Leyden approach," School of Economics and Finance Discussion Papers and Working Papers Series, School of Economics and Finance, Queensland University of Technology 071a, School of Economics and Finance, Queensland University of Technology.
  22. C. Graham & S. Pettinato, 2002. "Frustrated Achievers: Winners, Losers and Subjective Well-Being in New Market Economies," Journal of Development Studies, Taylor & Francis Journals, vol. 38(4), pages 100-140.
  23. Sendhil Mullainathan & Marianne Bertrand, 2001. "Do People Mean What They Say? Implications for Subjective Survey Data," American Economic Review, American Economic Association, vol. 91(2), pages 67-72, May.
  24. Tomes, Nigel, 1986. "Income distribution, happiness and satisfaction: A direct test of the interdependent preferences model," Journal of Economic Psychology, Elsevier, vol. 7(4), pages 425-446, December.
  25. 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.
  26. McBride, Michael, 2001. "Relative-income effects on subjective well-being in the cross-section," Journal of Economic Behavior & Organization, Elsevier, vol. 45(3), pages 251-278, July.
  27. David Neumark & Andrew Postlewaite, 1995. "Relative Income Concerns and the Rise in Married Women's Employment," NBER Working Papers 5044, National Bureau of Economic Research, Inc.
  28. Pollak, Robert A, 1976. "Interdependent Preferences," American Economic Review, American Economic Association, vol. 66(3), pages 309-20, June.
  29. Bill Dupor & Wen-Fang Liu, 2003. "Jealousy and Equilibrium Overconsumption," American Economic Review, American Economic Association, vol. 93(1), pages 423-428, March.
  30. Easterlin, Richard A., 1995. "Will raising the incomes of all increase the happiness of all?," Journal of Economic Behavior & Organization, Elsevier, vol. 27(1), pages 35-47, June.
  31. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(2), pages 205-251, April.
  32. Ruut Veenhoven, 1991. "Is happiness relative?," Social Indicators Research, Springer, vol. 24(1), pages 1-34, February.
  33. Andrew Postlewaite, . "The Social Basis of Interdependent Preferences," Penn CARESS Working Papers 6bd000503382ae2f0b90d25e3, Penn Economics Department.
  34. Oswald, Andrew J., 1983. "Altruism, jealousy and the theory of optimal non-linear taxation," Journal of Public Economics, Elsevier, vol. 20(1), pages 77-87, February.
  35. Timothy J. Bartik, 2003. "Local Economic Development Policies," Upjohn Working Papers and Journal Articles 03-91, W.E. Upjohn Institute for Employment Research.
  36. Ferrer-i-Carbonell, Ada, 2005. "Income and well-being: an empirical analysis of the comparison income effect," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 997-1019, June.
  37. Timothy J. Bartik, 1991. "Who Benefits from State and Local Economic Development Policies?," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, W.E. Upjohn Institute for Employment Research, number wbsle.
  38. Ireland, Norman J., 1998. "Status-seeking, income taxation and efficiency," Journal of Public Economics, Elsevier, vol. 70(1), pages 99-113, October.
  39. Andrew B. Abel, 2003. "Optimal Taxation When Consumers Have Endogenous Benchmark Levels of Consumption," NBER Working Papers 10099, National Bureau of Economic Research, Inc.
  40. David H. Autor & Mark G. Duggan, 2003. "The Rise In The Disability Rolls And The Decline In Unemployment," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 118(1), pages 157-205, February.
  41. Easterlin, Richard A, 2001. "Income and Happiness: Towards an Unified Theory," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 111(473), pages 465-84, July.
  42. Olivier Jean Blanchard & Lawrence F. Katz, 1992. "Regional Evolutions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1), pages 1-76.
  43. Ng, Yew-Kwang, 1987. "Relative-Income Effects and the Appropriate Level of Public Expenditure," Oxford Economic Papers, Oxford University Press, vol. 39(2), pages 293-300, June.
  44. van de Stadt, Huib & Kapteyn, Arie & van de Geer, Sara, 1985. "The Relativity of Utility: Evidence from Panel Data," The Review of Economics and Statistics, MIT Press, vol. 67(2), pages 179-87, May.
  45. Larry Samuelson, 2004. "Information-Based Relative Consumption Effects," Econometrica, Econometric Society, Econometric Society, vol. 72(1), pages 93-118, 01.
  46. Olof Johansson-Stenman & Fredrik Carlsson & Dinky Daruvala, 2002. "Measuring Future Grandparents" Preferences for Equality and Relative Standing," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 112(479), pages 362-383, April.
  47. Layard, Richard, 1980. "Human Satisfactions and Public Policy," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 90(363), pages 737-50, December.
  48. Saez, Emmanuel, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 68(1), pages 205-29, January.
  49. Samuel Bowles & Yongjin Park, 2005. "Emulation, Inequality, and Work Hours: Was Thorsten Veblen Right?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 115(507), pages F397-F412, November.
  50. Harald Uhlig & Lars Ljungqvist, 2000. "Tax Policy and Aggregate Demand Management under Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 90(3), pages 356-366, June.
  51. Martin Feldstein, 1998. "Income Inequality and Poverty," NBER Working Papers 6770, National Bureau of Economic Research, Inc.
  52. Sen, Amartya, 1983. "Poor, Relatively Speaking," Oxford Economic Papers, Oxford University Press, vol. 35(2), pages 153-69, July.
  53. Robson, Arthur J, 1992. "Status, the Distribution of Wealth, Private and Social Attitudes to Risk," Econometrica, Econometric Society, Econometric Society, vol. 60(4), pages 837-57, July.
  54. Boskin, Michael J & Sheshinski, Eytan, 1978. "Optimal Redistributive Taxation when Individual Welfare Depends upon Relative Income," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 92(4), pages 589-601, November.
Full references (including those not matched with items on IDEAS)

Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. To: John Cochrane, Re: Positional Externalites
    by Richard H. Serlin in Richard H. Serlin on 2012-02-18 09:19:00
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:10667. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.