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Are Relative-Income Effects Constant across the Well-being Distribution?

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  • Budría, Santiago

    (Universidad Nebrija)

Abstract

This paper challenges the common assumption made by economists to date that income comparisons are similarly important in different segments of the subjective well-being (SWB) distribution. The results, based on the 2000-2007 waves of the German SOEP and on a Generalized Ordered Probit for panel data, show that relative income, as measured either by the mean income of the reference group or the individual ordinal ranking within the group, exerts a differential effect across SWB levels. Such divergence is assessed by means of the tradeoff ratio between household income and the relative income variables. The results show that a low rank and falling below the average income in one's group are significant determinants of low SWB but largely irrelevant when accounting for high SWB. The fact that conditionally unhappy individuals are more sensitive to comparisons, particularly if they are unfavorable, is consistent with earlier laboratory studies in the field of psychology.

Suggested Citation

  • Budría, Santiago, 2012. "Are Relative-Income Effects Constant across the Well-being Distribution?," IZA Discussion Papers 6591, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp6591
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    Cited by:

    1. T. Lakshmanasamy & K. Maya, 2020. "The Effect of Income Inequality on Happiness Inequality in India: A Recentered Influence Function Regression Estimation and Life Satisfaction Inequality Decomposition," Indian Journal of Human Development, , vol. 14(2), pages 161-181, August.
    2. Andrew E. Clark & Conchita D'Ambrosio & Rong Zhu, 2021. "Living in the Shadow of the Past: Financial Profiles and Well‐Being," Scandinavian Journal of Economics, Wiley Blackwell, vol. 123(3), pages 910-939, July.
    3. Dong Zhou & Langchuan Peng, 2018. "The Relationship Between the Gender Gap in Subjective Well-Being and Leisure Activities in China," Journal of Happiness Studies, Springer, vol. 19(7), pages 2139-2166, October.
    4. Dusanee Kesavayuth & Robert E. Rosenman & Vasileios Zikos, 2016. "Retirement, Personality, And Well-Being," Economic Inquiry, Western Economic Association International, vol. 54(2), pages 733-750, April.
    5. Yongwei Chen & Dahai Fu & Xinyue Ye, 2021. "Income comparison and happiness: The role of fair income distribution," Australian Economic Papers, Wiley Blackwell, vol. 60(1), pages 41-63, March.
    6. Kesavayuth, Dusanee & Rosenman, Robert E. & Zikos, Vasileios, 2015. "Personality and health satisfaction," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 54(C), pages 64-73.

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    More about this item

    Keywords

    comparison income; subjective well-being; generalized ordered response model; income rank;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being

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