How much do we care about absolute versus relative income and consumption?

Abstract

We find, using survey-experimental methods, that most individuals are concerned with both relative income and relative consumption of particular goods. The degree of concern varies in the expected direction depending on the properties of the good.However, contrary to what has been suggested in the previous literature, we find that relative consumption is also important for vacation and insurance, which are typically seen as non-positional goods. Further, absolute consumption is also found to be important for cars and housing, which are widely regarded as highly positional.Implications for Pareto-efficient taxation are illustrated using the results from the experiment.

How much do others matter? Explaining positional concerns for different goods and personal characteristics

“…Whereas in previous research (Alpizar et al, 2005;Carlsson et al, 2007) items classified as easily observable turn out to have a higher degree of positionality, this is not the case in our survey, which relies on participants' perceptions of these attributes.…”

“…In recent years, a number of scholars have investigated individual concerns for relative standing with respect to different goods and personal attributes using survey data (see Hemenway, 1998, 2005;Johansson-Stenman et al, 2002;Alpizar et al, 2005;Solnick et al, 2007;Carlsson et al, 2007;Carlsson and Qin, 2010;Mechtel, 2011, 2012). These papers examine whether participants are willing to sacrifice consumption in absolute terms in order to advance their consumption rank in comparison to others.…”

“…Recent papers have restricted their analysis to two or three different types of items. Comparisons are made, for example, between personal characteristics and income (Solnick and Hemenway, 1998), private and public goods (Solnick and Hemenway, 2005), private consumption and leisure activity (Alpizar et al, 2005), or income, leisure, and private consumption (Carlsson et al, 2007). By introducing two questions regarding private pension schemes and interest-paying investments, we fill the gap with respect to savings.…”

“…In contrast to other authors, who have already argued that observability (Alpizar et al, 2005;Carlsson et al, 2007) and non-psychological effects (Hillesheim and Mechtel, 2011) play a role regarding positionality, our classification of items' characteristics is based on the assessment of our survey participants. Besides not having to rely on our own evaluation of items' characteristics, this approach offers another important advantage: we can directly use a participant's rating to explain the participant's individual answers which allows for an analysis on the micro-level.…”

The Relative Utility Hypothesis With and Without Self-Reported Reference Wages

“…8 Relative utility tests that are based on "hypothetical choice experiments" may overcome these issues since rivals and reference income levels are well-defined for survey participants in such experiments. See, for example, Solnick and Hemenway (1998); Johansson-Stenman et al (2002); Alpizar et al (2005); Carlsson et al (2009). The general conclusion in these studies show that relative income effects are about as important as absolute income effects.…”