A Glance into the Tunnel: Experimental Evidence on Income Comparisons Under Uncertainty

50 Pages Posted: 2 Feb 2016

See all articles by Harald Lang

Harald Lang

Max Planck Institute for Tax Law and Public Finance

Florian Morath

Department of Public Finance, University of Innsbruck; Max Planck Institute for Tax Law and Public Finance

Date Written: December 15, 2015

Abstract

Learning that others earn more may reduce individual well-being but it can also be informative about the own income prospects. In an environment of uncertainty over the own income, this paper provides experimental evidence on direct income-comparison effects on well-being and informational effects from observing signals about others income prospects. We find that individual beliefs about the own income are adjusted downwards when observing that others are likely to earn less, but do not significantly adjust when observing that others are likely to earn more. Individual satisfaction decreases when others are likely to earn more but does not change significantly when others are likely to earn less. Overall, informational effects countervail direct income-comparison effects if and only if the uncertainty over the own income is sufficiently strong.

Keywords: tunnel effect, relative income, expectations, belief information, subjective well-being, experiment

JEL Classification: C91, D31, D63, D84

Suggested Citation

Lang, Harald and Morath, Florian, A Glance into the Tunnel: Experimental Evidence on Income Comparisons Under Uncertainty (December 15, 2015). Working Paper of the Max Planck Institute for Tax Law and Public Finance No. 2015-13, Available at SSRN: https://ssrn.com/abstract=2703756 or http://dx.doi.org/10.2139/ssrn.2703756

Harald Lang

Max Planck Institute for Tax Law and Public Finance ( email )

Marstallplatz 1
Munich, 80539
Germany

Florian Morath (Contact Author)

Department of Public Finance, University of Innsbruck ( email )

Max Planck Institute for Tax Law and Public Finance ( email )

Marstallplatz 1
Munich, 80539
Germany

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