Relative Rank and Life Satisfaction: Evidence from US Households

Abstract

We use the Panel Study of Income Dynamics (PSID), a longitudinal study of a representative sample of the US population, to examine social rank effects on the relationship between life satisfaction and economic status. We examine the effects of income, home values, mortgage debts, financial assets and credit card debts. We find that the absolute level of these economic variables does not influence life satisfaction, but (except for credit card debt) by the relative ranked position of the level within a social comparison group. The results are robust to (a) a wide range of controls, (b) choice of comparison group, (c) individual fixed effects, (e) reference-group mean comparisons and (f) various competing transformations of the absolute levels of the predictor variables. We also find that the effects of relative rank are stronger when income inequality is high. We conclude that social comparison effects underpin the relationship between economic status and subjective well-being, and that concern with social status is higher when income inequality is high.

Keywords: relative rank, social comparison, life satisfaction, income inequality

JEL Classification: D03, D12, D60