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Neighbors as Negatives: Relative Earnings and Well-Being

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  • 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 data containing various 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, that is, people having utility functions that depend on relative consumption in addition to absolute consumption.

Suggested Citation

  • Erzo F. P. Luttmer, 2005. "Neighbors as Negatives: Relative Earnings and Well-Being," The Quarterly Journal of Economics, Oxford University Press, vol. 120(3), pages 963-1002.
  • Handle: RePEc:oup:qjecon:v:120:y:2005:i:3:p:963-1002.
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    File URL: http://hdl.handle.net/10.1093/qje/120.3.963
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    • D6 - Microeconomics - - Welfare Economics
    • H0 - Public Economics - - General

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