Inequality-Aversion and Income Mobility: A Direct Test
A number of recent papers have found evidence of interdependencies in utility functions, in that, ceteris paribus, individual well-being falls as others' mean income or consumption increases. This paper asks if, in addition, the distribution of income in the reference group matters. I consider full-time employees in eleven waves of British panel data, and take life satisfaction and the GHQ-12 as measures of individual well-being. I find that (i) well-being falls with average reference group income, but (ii) well-being is significantly positively correlated with reference group income inequality. This finding runs counter to the supposed public dislike of inequality. Last, I show that inequality-loving is strongest for those whose own incomes have shown the most variability over the past three years, and those who are on the steepest income path. As such, income inequality seems to include some aspect of opportunity.
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