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

Martin Leites () and Xavi Ramos ()
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Martin Leites: Universidad de la República, Uruguay

No 11404, IZA Discussion Papers from Institute of Labor Economics (IZA)

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 on to experienced utility. We draw on a unique 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 is only satisfied for incomes that are sufficiently distant from the reference income. Our heterogeneity analysis shows that the slope of the value function differs across individuals who care differently about income comparisons, people with different personality traits, or social beliefs.

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)
New Economics Papers: this item is included in nep-hap, nep-hpe and nep-upt
Date: 2018-03
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Related works:
Working Paper: The effect of relative concern on life satisfaction: Relative deprivation and loss aversion (2018) Downloads
Working Paper: The effect of relative concern on life satisfaction: Relative deprivation and loss aversion (2017) Downloads
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