Choosing Your Pond: Revealed-Preference Estimates of Relative Income Concerns

Posted: 4 Apr 2017 Last revised: 22 Jul 2017

See all articles by Nicolas L. Bottan

Nicolas L. Bottan

Cornell University - Department of Policy Analysis and Management

Ricardo Perez-Truglia

University of California, Berkeley; National Bureau of Economic Research (NBER)

Date Written: July 1, 2017

Abstract

We provide a unique revealed-preference test of the hypothesis that, in addition to their absolute level of consumption, individuals care about their relative consumption. We study the decisions of senior medical students participating in the National Residency Match Program (NRMP). They must choose between programs that offer similar nominal income, but in cities with different costs of living and income distributions. As a result, they face trade-offs between absolute consumption and relative consumption. We conducted a survey experiment with 1,100 NRMP participants. We elicited their perceptions about cost of living and income distribution in the cities that they are considering living in, as well as their rank order submissions. To assess the direction of causality, we embedded an information-provision experiment that generates exogenous variation in perceptions. We find that, holding absolute consumption constant, the average individual prefers higher relative consumption. Moreover, we find substantial and meaningful heterogeneity in relative concerns by relationship status.

Keywords: income comparisons, relative income, field experiment

JEL Classification: D03, D60, D31, D80, I31, K34, Z10

Suggested Citation

Bottan, Nicolas Luis and Perez-Truglia, Ricardo, Choosing Your Pond: Revealed-Preference Estimates of Relative Income Concerns (July 1, 2017). Available at SSRN: https://ssrn.com/abstract=2944427

Nicolas Luis Bottan

Cornell University - Department of Policy Analysis and Management ( email )

Ithaca, NY
United States
6072555724 (Phone)

HOME PAGE: http://https://www.nicolasbottan.com

Ricardo Perez-Truglia (Contact Author)

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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