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KDI Policy Study 2014-01
People's concern about their relative status is regarded as an explanation to the Easterlin paradox, which reports that happiness has not increased despite continued growth in average income. The strength of concerns about relative position varies across people. First, we examine the socio-demographic characteristics and values that lead to a strong relative concern. And then we comprehensively investigate differences in financial outcomes, health, happiness, and behaviors by the degree of relative concern. In particular, Korea is an appropriate country for this study as Koreans have experienced rapid economic growth and there exists severe status race in their education system and labor market. Using data from our experimental survey of 3,000 Koreans, we examine their preference for positional goods and behaviors regarding herding, status seeking, and altruism. Our results show that those who have stronger relative concerns are more likely to live in upscale districts and place economic values above non-pecuniary values, and, in reality, they have better financial outcomes. They also exhibit higher tendencies of overconsumption and conspicuous consumption. Their health, however, is worse than others, specifically in regards to psychological health. Moreover, overall happiness and satisfaction in every dimension are proved to be lower for those who have stronger relative concerns. In a series of hypothetical situations of our survey, they consistently show higher inclinations toward status race and herding but lower degrees of altruism or sympathy. As for policy implications, we discuss the following issues. First, we show Koreans' diagnoses of the reasons for their unhappiness and examine how relative concern affects such diagnoses. Second, we discuss government intervention to remedy positional externalities based on our survey results about people's perceived positionality of selected goods that have a negative influence on others' welfare. Third, we show that Koreans' relative concerns do not necessarily arise from their materialistic values and they are undergoing transformation of individual values toward post-materialism, which makes a room for remedial change of institutions that have led excessive social comparisons and competitions. Fourth, we discuss policy directions for reducing negative effects of social comparison in the context of contemporary Korea focusing on the education system and labor market reform. Last but not least, we suggest some examples of nudge ideas using people's relative concern for the whole society and the motivation of self-improvement via social comparison, which implies that relative concern can be made good use of as well.
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