Working Paper: NBER ID: w10667
Authors: Erzo FP Luttmer
Abstract: This paper investigates whether individuals feel worse off when others around them earn more. In other words, do people care about relative position and does lagging behind the Joneses' diminish well-being? To answer this question, I match individual-level panel data containing a number of indicators of well-being to information about local average earnings. I find that, controlling for an individual's own income, higher earnings of neighbors are associated with lower levels of self-reported happiness. The data's panel nature and rich set of measures of well-being and behavior indicate that this association is not driven by selection or by changes in the way people define happiness. There is suggestive evidence that the negative effect of increases in neighbors' earnings on own well-being is most likely caused by interpersonal preferences people having utility functions that depend on relative consumption in addition to absolute consumption.
Keywords: No keywords provided
JEL Codes: D6; H0; J0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Neighbors' earnings (J31) | Individual happiness (I31) |
| Increase in neighbors' earnings (E25) | Decrease in individual happiness (I31) |
| Individual income (D31) | Individual happiness (I31) |