Choosing Your Pond: Revealed-Preference Estimates of Relative Income Concerns
Posted: 4 Apr 2017 Last revised: 22 Jul 2017
Date Written: July 1, 2017
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
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