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The relative income and relative deprivation hypotheses : a review of the empirical literature

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  • Verme, Paolo

Abstract

The paper provides a review of the empirical literature in economics that has attempted to test the relative income hypothesis as put forward by Duesemberry (1949) and the relative deprivation hypothesis as formalized by Runciman (1966). It is argued that these two hypotheses and the empirical models used to test them are essentially similar and make use of the same relative income concept. The review covers the main intellectual contributions that led to the formulation and tests of these hypotheses, the main formulations of the utility and econometric equations used in empirical studies, the main econometric issues that complicate tests of the hypotheses, and the empirical results found in the literature. The majority of studies uses absolute and relative income together as explanatory factors in utility models and finds absolute income to have a positive and significant effect on utility (happiness). The majority of studies also finds relative income to be a significant factor in explaining utility but the sign of this relation varies across studies. The source of this variation is complex to detect given that few results are directly comparable across studies because of differences in model specifications.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6606.

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Date of creation: 01 Sep 2013
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Handle: RePEc:wbk:wbrwps:6606

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Keywords: Inequality; Economic Theory&Research; Labor Policies; Poverty Impact Evaluation; Rural Poverty Reduction;

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  1. Herwaarden, F.G. van & Kapteyn, A.J., 1979. "Empirical comparison of the shape of welfare functions," Open Access publications from Tilburg University urn:nbn:nl:ui:12-361905, Tilburg University.
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  7. Silber, Jacques & Verme, Paolo, 2009. "Distributional change, reference groups and the measurement of relative deprivation," IRISS Working Paper Series 2009-13, IRISS at CEPS/INSTEAD.
  8. Geeta Kingdon & John Knight, 2004. "Community, Comparisons and Subjective Well-being in a Divided Society," Economics Series Working Papers WPS/2004-21, University of Oxford, Department of Economics.
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  14. Paolo Verme, 2010. "Happiness, deprivation and the alter ego," Working Papers 155, ECINEQ, Society for the Study of Economic Inequality.
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  17. Christian Grund & Dirk Sliwka, 2003. ""The Further We Stretch the Higher the Sky" - On the Impact of Wage Increases on Job Satisfaction," Bonn Econ Discussion Papers bgse1_2003, University of Bonn, Germany.
  18. Shields, Michael A. & Wheatley Price, Stephen, 2001. "Exploring the Economic and Social Determinants of Psychological and Psychosocial Health," IZA Discussion Papers 396, Institute for the Study of Labor (IZA).
  19. Paolo Verme, 2010. "Life satisfaction and income inequality," Working Papers 178, ECINEQ, Society for the Study of Economic Inequality.
  20. Michael A. Shields & Stephen Wheatley Price, 2005. "Exploring the economic and social determinants of psychological well-being and perceived social support in England," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 168(3), pages 513-537.
  21. Vendrik, Maarten & Woltjer, Geert, 2006. "Happiness and Loss Aversion: When Social Participation Dominates Comparison," IZA Discussion Papers 2218, Institute for the Study of Labor (IZA).
  22. 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.
  23. Hung-Lin Tao & Shih-Yung Chiu, 2009. "The Effects of Relative Income and Absolute Income on Happiness," Review of Development Economics, Wiley Blackwell, vol. 13(1), pages 164-174, 02.
  24. Thorstein Veblen, 1909. "The Limitations of Marginal Utility," Journal of Political Economy, University of Chicago Press, vol. 17, pages 620.
  25. 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.
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