41 Pages Posted: 21 Feb 2008
Date Written: May 2007
We test empirically whether people's life satisfaction depends on their relative income position in the neighbourhood, drawing on a unique dataset, the German Socio-economic Panel Study (SOEP) matched with micro-marketing indicators of population characteristics. Relative deprivation theory suggests that individuals are happier the better their relative income position in the neighbourhood is. To test this theory we estimate micro-economic happiness models for the years 1994 and 1999 with controls for own income and for neighbourhood income at the zip-code level (roughly 9,000 people). There exist no negative and no statistically significant associations between neighbourhood income and life satisfaction, which refutes relative deprivation theory. If anything, we find positive associations between neighbourhood income and happiness in all cross-sectional models and this is robust to a number of robustness tests, including adding in more controls for neighbourhood quality, changing the outcome variable, and interacting neighbourhood income with indicators that proxy the extent to which individuals may be assumed to interact with their neighbours. We argue that the scale at which we measure neighbourhood characteristics may be too large still to identify the comparison effect sought after.
Keywords: Life satisfaction, Neighbourhood effects, Comparison income, Reference group
JEL Classification: I31, C23, Z1
Suggested Citation: Suggested Citation
Knies, Gundi and Burgess, Simon M. and Propper, Carol, Keeping Up with the Schmidts - An Empirical Test of Relative Deprivation Theory in the Neighbourhood Context (May 2007). SOEP Paper No. 24. Available at SSRN: https://ssrn.com/abstract=1096121 or http://dx.doi.org/10.2139/ssrn.1096121