Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/180422 
Year of Publication: 
2018
Series/Report no.: 
IZA Discussion Papers No. 11404
Publisher: 
Institute of Labor Economics (IZA), Bonn
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.
Subjects: 
life satisfaction
relative income
loss aversion
prospect theory
JEL: 
D6
I31
Document Type: 
Working Paper

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