The relative income effect: an experiment
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The relative income effect: an experiment John Ifcher1 · Homa Zarghamee2 · Dan Houser3 · Lina Diaz3 Received: 20 February 2019 / Revised: 6 February 2020 / Accepted: 14 February 2020 © Economic Science Association 2020
Abstract John Stuart Mill claimed that “men do not desire merely to be rich, but richer than other men.” Are people made happy by being richer than others? Or are people made happy by favorable comparisons to others more generally, and being richer is merely a proxy for this ineffable relativity? We conduct an online experiment absent choice in which we measure subjective well-being (SWB) before and after an exogenous shock that reveals to subjects how many experimental points they and another subject receive, and whether or not points are worth money. We find that subjects are made significantly happier when they receive monetized rather than non-monetized points, suggesting money is valued more than the points it represents. In contrast, subjects are made equally unhappy when they receive fewer monetized points as when they receive fewer non-monetized points than others, suggesting relative money is not valued more than the relative points it represents. We find no evidence that subjects are made happier by being “richer” than others (i.e., by receiving more points—either monetized or non-monetized—than others). Subgroup analyses reveal women are made unhappier (than men) by being “richer” and “poorer” than others, and conservatives are made unhappier (than progressives) by being “poorer” than others. Our experimental-SWB approach is easy to administer and may complement choice-based tasks in future experiments to better estimate preference parameters. Keywords Subjective well-being · Relative income · Others’ income · Income comparisons · Happiness · Experiments JEL Classification C91 · D31 · D63 · I31
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s1068 3-020-09648-w) contains supplementary material, which is available to authorized users. * Homa Zarghamee [email protected] 1
Santa Clara University, Santa Clara, CA, USA
2
Barnard College, New York, NY, USA
3
George Mason University, Fairfax, VA, USA
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1 Introduction John Stuart Mill is credited with the claim that “men do not desire merely to be rich, but richer than other men.”1 This claim raises two fundamental questions. Does being richer than others make people happy? And if so, why? Empirical evidence regarding the first question is mixed. While subjective well-being (SWB) scholars have assembled substantial empirical evidence from large observational datasets of a negative relationship between others’ income and one’s own SWB (Blanchflower and Oswald 2004; Clark et al. 2008; Helliwell et al. 2012; Luttmer 2005), identification is often confounded. For example, some studies have found that cost-of-living explains the negative relationship (e.g., Ifcher et al. 2018), while others have estimated a positive relationship (Brodeur and Fle
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