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The Optimal Choice of a Reference Standard for Income Comparisons: Indirect Evidence from Immigrants' Return Visits

  • Holger Stichnoth

I propose two new tests of Falk and Knell's (2004) prediction that individuals' reference income increases with ability. To overcome the difficulty that the reference incomeis not observed in existing large data sets, I extend Falk and Knell's model to establish a link between immigrants' reference income and their return visits to their countries of origin. I derive the (arguably counter-intuitive) predictions that more educated immigrants are less likely to have returned to their country of origin for a visit, and that they are more likely to have difficulty feeling at home when they do return for a visit. Both predictions are confirmed on four waves of data from the German Socio-Economic Panel. The estimated marginal effects are statistically significant, but rather small in size.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.346490.de/diw_sp0264.pdf
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Paper provided by DIW Berlin, The German Socio-Economic Panel (SOEP) in its series SOEPpapers on Multidisciplinary Panel Data Research with number 264.

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Length: 21 p.
Date of creation: 2010
Date of revision:
Handle: RePEc:diw:diwsop:diw_sp264
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  1. Andrew E. Clark & Paul Frijters & Michael A. Shields, 2008. "Relative Income, Happiness, and Utility: An Explanation for the Easterlin Paradox and Other Puzzles," Journal of Economic Literature, American Economic Association, vol. 46(1), pages 95-144, March.
  2. Falk, Armin & Knell, Markus, 2004. "Choosing the Joneses: Endogenous Goals and Reference Standards," IZA Discussion Papers 1152, Institute for the Study of Labor (IZA).
  3. Erzo F.P. Luttmer, 2004. "Neighbors as Negatives: Relative Earnings and Well-Being," NBER Working Papers 10667, National Bureau of Economic Research, Inc.
  4. 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.
  5. Charles F. Manski, 2000. "Economic Analysis of Social Interactions," NBER Working Papers 7580, National Bureau of Economic Research, Inc.
  6. Gert G. Wagner & Joachim R. Frick & Jürgen Schupp, 2007. "The German Socio-Economic Panel Study (SOEP): Scope, Evolution and Enhancements," SOEPpapers on Multidisciplinary Panel Data Research 1, DIW Berlin, The German Socio-Economic Panel (SOEP).
  7. Johannes Schwarze & Rainer Winkelmann, 2005. "What can happiness research tell us about altruism? Evidence from the German Socio-Economic Panel," SOI - Working Papers 0503, Socioeconomic Institute - University of Zurich, revised Sep 2005.
  8. 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.
  9. Conchita D’Ambrosio & Joachim Frick, 2007. "Income Satisfaction and Relative Deprivation: An Empirical Link," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 81(3), pages 497-519, May.
  10. Schwarze, Johannes & Harpfer, Marco, 2007. "Are people inequality averse, and do they prefer redistribution by the state?: Evidence from German longitudinal data on life satisfaction," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 36(2), pages 233-249, April.
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