Life Satisfaction and Economic Position Relative to Neighbors: Perceptions Versus Reality

I examine the relationship between economic position relative to local neighbors and life satisfaction in rural Bangladesh. In particular, I exploit a novel household level census of three villages that includes the geospatial coordinates of every household and a perception measure of economic position relative to neighbors. This allows for exploring the sensitivity of the aforementioned relationship to (1) different objective definitions of neighborhood, and (2) the type of positional measure used, objective or perceived. I find that a higher perceived position improves life satisfaction while objective position has no statistically significant effect. This difference stems from a very low correlation between the objective and perceived positional measures. The low correlation can be explained by individual specific heterogeneity in definitions of neighbor. However, observable socioeconomic and demographic variables cannot explain the difference.