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The relative income effect: an experiment

Published online by Cambridge University Press:  14 March 2025

John Ifcher,
Homa Zarghamee,
Dan Houser and
Lina Diaz
John Ifcher
Affiliation:
Santa Clara University, Santa Clara, CA, USA
Homa Zarghamee*
Affiliation:
Barnard College, New York, NY, USA
Dan Houser
Affiliation:
George Mason University, Fairfax, VA, USA
Lina Diaz
Affiliation:
George Mason University, Fairfax, VA, USA
*
hzargham@barnard.edu
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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-beingRelative incomeOthers’ incomeIncome comparisonsHappinessExperiments

JEL classification

D63: Equity, Justice, Inequality, and Other Normative Criteria and MeasurementD31: Personal Income, Wealth, and Their DistributionsI31: General Welfare, Well-BeingC91: Laboratory, Individual Behavior

Information

Type
Original Paper
Information
Experimental Economics , Volume 23 , Issue 4 , December 2020, pp. 1205 - 1234
Copyright
Copyright © 2020 Economic Science Association

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Footnotes

Electronic supplementary material The online version of this article (https://doi.org/10.1007/s10683-020-09648-w) contains supplementary material, which is available to authorized users.

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