The effect of relative concern on life satisfaction: Relative deprivation and loss aversion

Martí­n Leites () and Xavi Ramos ()
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Martí­n Leites: Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economí­a

No 17-18, Documentos de Trabajo (working papers) from Instituto de Economía - IECON

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)
Pages: 33 pages
Date: 2017-12
New Economics Papers: this item is included in nep-hap, nep-hpe and nep-upt
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https://hdl.handle.net/20.500.12008/18993

Related works:
Working Paper: The effect of relative concern on life satisfaction: Relative deprivation and loss aversion (2018)
Working Paper: The Effect of Relative Concern on Life Satisfaction: Relative Deprivation and Loss Aversion (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ulr:wpaper:dt-18-17

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