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A Glance into the Tunnel: Experimental Evidence on Income Comparisons under Uncertainty

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  • Harald Lang
  • Florian Morath

Abstract

Learning that others earn more may reduce individual well-being but it can also be informative about the own income prospects. In an environment of uncertainty over the own income, this paper provides experimental evidence on direct income-comparison effects on well-being and informational effects from observing signals about others' income prospects. We find that individual beliefs about the own income are adjusted downwards when observing that others are likely to earn less, but do not significantly adjust when observing that others are likely to earn more. Individual satisfaction decreases when others are likely to earn more but does not change significantly when others are likely to earn less. Overall, informational effects countervail direct incomecomparison effects if and only if the uncertainty over the own income is sufficiently strong.

Suggested Citation

  • Harald Lang & Florian Morath, 2015. "A Glance into the Tunnel: Experimental Evidence on Income Comparisons under Uncertainty," Working Papers tax-mpg-rps-2015-13, Max Planck Institute for Tax Law and Public Finance.
  • Handle: RePEc:mpi:wpaper:tax-mpg-rps-2015-13
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    More about this item

    Keywords

    Tunnel effect; relative income; expectations; belief formation; subjectivewell-being; experiment;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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