The Effect of Relative Concern on Life Satisfaction: Relative Deprivation and Loss Aversion

35 Pages Posted: 2 Apr 2018

See all articles by Martin Leites

Martin Leites

Universidad de la República

Xavier Ramos

Universitat Autònoma de Barcelona; Institute for the Study of Labor (IZA)

Abstract

Income comparisons are important for individual well-being. We examine the shape of the relationship between relative income and life satisfaction, and test empirically if the features of the value function of prospect theory carry on to experienced utility. We draw on a unique dataset for a middle-income country, that allows us to work with an endogenous reference income, which differs for individuals with the same observable characteristics, depending on the perception error about their relative position in the distribution. We find the value function for experienced utility to be concave for both positive and, at odds with prospect theory, also negative relative income. Loss aversion is only satisfied for incomes that are sufficiently distant from the reference income. Our heterogeneity analysis shows that the slope of the value function differs across individuals who care differently about income comparisons, people with different personality traits, or social beliefs.

Keywords: life satisfaction, relative income, loss aversion, prospect theory

JEL Classification: D6, I31

Suggested Citation

Leites, Martin and Ramos, Xavier, The Effect of Relative Concern on Life Satisfaction: Relative Deprivation and Loss Aversion. IZA Discussion Paper No. 11404. Available at SSRN: https://ssrn.com/abstract=3153368

Martin Leites (Contact Author)

Universidad de la República ( email )

Avenida 18 de Julio 182
Montevideo, 11100
Uruguay

Xavier Ramos

Universitat Autònoma de Barcelona ( email )

Dept. Economia Aplicada
Campus UAB
Bellaterra, Barcelona 08193
Spain

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

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