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Income Comparison, Income Formation, and Subjective Well-Being: New Evidence on Envy versus Signaling

  • Heinz Welsch

    ()

    (University of Oldenburg, Department of Economics)

  • Jan Kühling

    ()

    (University of Oldenburg, Department of Economics)

Drawing on the distinction between envy and signaling effects in income comparison, this paper uses 307,465 observations for subjective well-being and its covariates from Germany, 1990-2009, to study whether the nature of income comparison has changed in the process of economic development, and how such changes are related to changes in the nature of income formation. By conceptualizing a person’s comparison income as the income predicted by an earnings equation, we find that, while in 1990-1999 envy has been the dominant concern in West Germany and signaling the dominant factor in East Germany, income comparison was non-existing in 2000-2009. We also find that the earnings equation reflects people’s ability more accurately in the second than in the first period. Together, these findings suggest that comparing one’s income with people of the same ability is important only when ability is insufficiently reflected in own income.

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File URL: http://www.uni-oldenburg.de/fileadmin/user_upload/wire/fachgebiete/vwl/V-356-13.pdf
File Function: First version, 2013
Download Restriction: no

Paper provided by University of Oldenburg, Department of Economics in its series Working Papers with number V-356-13.

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Length: 27 pages
Date of creation: Apr 2013
Date of revision: Apr 2013
Publication status: Published in Oldenburg Working Papers V-356-13
Handle: RePEc:old:dpaper:356
Contact details of provider: Postal: 26111 Oldenburg
Phone: +49 441 798-4107
Fax: +49 441 798-4116
Web page: http://www.vwl.uni-oldenburg.de/
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  1. Clark, Andrew E. & Senik, Claudia, 2009. "Who Compares to Whom? The Anatomy of Income Comparisons in Europe," CEPREMAP Working Papers (Docweb) 0907, CEPREMAP.
  2. Daniel Kahneman & Alan B. Krueger, 2006. "Developments in the Measurement of Subjective Well-Being," Journal of Economic Perspectives, American Economic Association, vol. 20(1), pages 3-24, Winter.
  3. Rafael Di Tella & Robert MacCulloch, 2006. "Some Uses of Happiness Data in Economics," Journal of Economic Perspectives, American Economic Association, vol. 20(1), pages 25-46, Winter.
  4. Senik, Claudia, 2006. "Ambition and Jealousy: Income Interactions in the "Old" Europe versus the "New" Europe and the United States," IZA Discussion Papers 2083, Institute for the Study of Labor (IZA).
  5. Dolan, Paul & Peasgood, Tessa & White, Mathew, 2008. "Do we really know what makes us happy A review of the economic literature on the factors associated with subjective well-being," Journal of Economic Psychology, Elsevier, vol. 29(1), pages 94-122, February.
  6. Bruno S. Frey & Alois Stutzer, 2002. "What Can Economists Learn from Happiness Research?," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 402-435, June.
  7. Gundi Knies, 2012. "Income Comparisons Among Neighbours and Satisfaction in East and West Germany," Social Indicators Research, Springer, vol. 106(3), pages 471-489, May.
  8. Ada Ferrer-i-Carbonell & Paul Frijters, 2004. "How Important is Methodology for the estimates of the determinants of Happiness?," Economic Journal, Royal Economic Society, vol. 114(497), pages 641-659, 07.
  9. 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.
  10. Eichhorst, Werner & Marx, Paul, 2009. "Reforming German Labor Market Institutions: A Dual Path to Flexibility," IZA Discussion Papers 4100, Institute for the Study of Labor (IZA).
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