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Rethinking the Relative Income Hypothesis

  • Cristina Blanco-Perez

Income comparisons have been found to be important for individual health. However, the literature has so far looked solely at upward comparisons, disregarding the effects of comparisons with worse-off individuals. In this paper, I use a broad definition of relative income to test simultaneously for the effect of "upward" and "downward" income comparisons on health. Relative deprivation and relative satisfaction indexes are used to summarise upward and downward comparisons. Panel data models are used to correct for income endogeneity bias due to omitted variables. Using German Socio-Economic Panel data (SOEP), results show that relative deprivation has a positive effect, while relative satisfaction has a deleterious impact on health. These findings hold after correcting for unobserved heterogeneity and are robust to using quasi-objective health measures (but mental health) and to different reference groups.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.411488.de/diw_sp0501.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 501.

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Length: 49 p.
Date of creation: 2012
Date of revision:
Handle: RePEc:diw:diwsop:diw_sp501
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  1. Miller, Douglas L. & Paxson, Christina, 2006. "Relative income, race, and mortality," Journal of Health Economics, Elsevier, vol. 25(5), pages 979-1003, September.
  2. 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).
  3. Ulf-G. Gerdtham & Magnus Johannesson, 2004. "Absolute Income, Relative Income, Income Inequality, and Mortality," Journal of Human Resources, University of Wisconsin Press, vol. 39(1).
  4. Hildebrand, Vincent & Van Kerm, Philippe, 2005. "Income inequality and self-rated health status: Evidence from the European Community Household Panel," IRISS Working Paper Series 2005-01, IRISS at CEPS/INSTEAD.
  5. Fehr, Ernst & Schmidt, Klaus M., 1999. "A theory of fairness, competition, and cooperation," Munich Reprints in Economics 20650, University of Munich, Department of Economics.
  6. Guy Mayraz & Gert G. Wagner & Jürgen Schupp, 2009. "Life satisfaction and relative income: perceptions and evidence," LSE Research Online Documents on Economics 28606, London School of Economics and Political Science, LSE Library.
  7. John P. Haisken-DeNew & Markus H. Hahn, 2010. "PanelWhiz: Efficient Data Extraction of Complex Panel Data Sets - An Example Using the German SOEP," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, vol. 130(4), pages 643-654.
  8. Karlsson, Martin & Nilsson, Therese & Lyttkens, Carl Hampus & Leeson, George, 2010. "Income inequality and health: Importance of a cross-country perspective," Social Science & Medicine, Elsevier, vol. 70(6), pages 875-885, March.
  9. Debra Sabatini Dwyer & Olivia S. Mitchell, 1998. "Health Problems as Determinants of Retirement: Are Self-Rated Measures Endogenous?," NBER Working Papers 6503, National Bureau of Economic Research, Inc.
  10. Senik, Claudia, 2007. "Direct Evidence on Income Comparisons and their Welfare Effects," IZA Discussion Papers 3195, Institute for the Study of Labor (IZA).
  11. Christopher F Baum, 2006. "An Introduction to Modern Econometrics using Stata," Stata Press books, StataCorp LP, number imeus, November.
  12. Origo, Federica & Pagani, Laura, 2009. "Flexicurity and job satisfaction in Europe: The importance of perceived and actual job stability for well-being at work," Labour Economics, Elsevier, vol. 16(5), pages 547-555, October.
  13. Theodossiou, I. & Zangelidis, A., 2009. "The social gradient in health: The effect of absolute income and subjective social status assessment on the individual's health in Europe," Economics & Human Biology, Elsevier, vol. 7(2), pages 229-237, July.
  14. Armin Falk & Markus Knell, 2004. "Choosing the Joneses: Endogenous Goals and Reference Standards," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(3), pages 417-435, October.
  15. Matthias Nübling & Hanfried H. Andersen & Axel Mühlbacher & Jürgen Schupp & Gert G. Wagner, 2007. "Computation of Standard Values for Physical and Mental Health Scale Scores Using the SOEP Version of SF12v2," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, vol. 127(1), pages 171-182.
  16. Jones, Andrew M. & Wildman, John, 2008. "Health, income and relative deprivation: Evidence from the BHPS," Journal of Health Economics, Elsevier, vol. 27(2), pages 308-324, March.
  17. KNIGHT, John & SONG, Lina & GUNATILAKA, Ramani, 2009. "Subjective well-being and its determinants in rural China," China Economic Review, Elsevier, vol. 20(4), pages 635-649, December.
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