The Effect of Relative Income Concerns on Life Satisfaction: Relative Deprivation and Loss Aversion

Martín Leites () and Xavier Ramos ()
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Martín Leites: University of la República
Xavier Ramos: Universitat Autònoma de Barcelona, IZA, and EQUALITAS

Journal of Happiness Studies, 2022, vol. 23, issue 7, No 17, 3485-3515

Abstract: Abstract Income comparisons are important for individual well-being. We examine the shape of the relationship between relative income and life satisfaction, and test empirically if the features of the value function of prospect theory carry over to experienced utility. We draw on a unique panel dataset for a middle-income country that allows us to work with an endogenous reference income, which differs for individuals with the same observable characteristics depending on the perception error about their relative position in the distribution. We find the value function for experienced utility to be concave for both positive and, at odds with prospect theory, also negative relative income. Loss aversion holds only for incomes that are sufficiently distant from the reference income. Our heterogeneity analysis shows that the slope of the value function is contingent on people’s personality, social beliefs, and how much they care about income comparisons.

Keywords: Life satisfaction; Relative income; Loss aversion; Prospect theory (search for similar items in EconPapers)
JEL-codes: D6 I31 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s10902-022-00555-w

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