Positional Externalities Cause Large and Preventable Welfare Losses

Frank, Robert H.

doi:10.1257/000282805774670392

Cited by 338 publications

(210 citation statements)

References 2 publications

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“…Boskin and Sheshinski (1978) and Oswald (1983) theoretically analyze tax policy implications of relative utility, while Abel (1990); Bakshi and Chen (1996); Gali (1994);and Campbell and Cochrane (1999) examined such relative effects on asset pricing. Frank (1985) and Frank (2005) show that relative concerns are more important for positional goods consumption than other goods such as leisure, and that the structure of utility functions with relative concerns over different types of goods is of key importance in the valuations of social welfare. 11 Given the discrete, hierarchical nature of the dependent variable, the vast majority of happiness studies in economics have estimated equations similar to 1 using ordered logit or probit estimators.…”

Section: Data Descriptionmentioning

confidence: 99%

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

et al. 2010

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis article uses survey data of 90,000 union employees working in 62 publicly-traded companies in Japan between 1990 and 2004 to study the effect of both own and self-reported reference wages on workers' subjective well-being levels. The availability of self-reported reference wages generates very robust findings that do not depend on questionable identifying assumptions. These findings confirm that higher estimates by workers of their peers' earnings are associated with lower levels of life and job satisfaction. These comparison effects are statistically and economically strong but are smaller in absolute value than the impact of workers' own wages on their own utility. We compare our results with standard tests of the relative utility hypothesis in the literature that recur to alternative proxies for comparison wages, including: (i) Mincer-predicted wages; (ii) cell averages defined over different groups within our dataset; (iii) cell wage averages estimated from an external data source; and (iv) colleagues' average wages. In spite of their potential flaws-that we discuss-these alternative empirical constructs employed in the literature do not introduce a simple classical measurement error problem and the bias attributed to this measurement error issue can go in both directions. We propose a simple IV strategy when the self-reported reference wage is not available that does not eliminate the bias but delivers a lower bound of the "true" effect. We also address the issue of endogeneity of self-reported reference wages in our subjective well-being regressions by accounting for workers' pessimistic attitudes at the workplace.

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Section: Data Descriptionmentioning

confidence: 99%

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

et al. 2010

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“…Material purchases are more likely than experiential ones to be positional goods, and thus people are more likely to rate their happiness with material goods by considering other people's possessions (Frank, 2005).2…”

Section: Literature Reviewmentioning

confidence: 99%

“…Because experiences live in our memories and are more unique, the pool of relevant alternatives is smaller. In sum, we are more likely to be concerned with the better or missed options if we buy material goods, and this concern can lead to disappointment.Material purchases are more likely than experiential ones to be positional goods, and thus people are more likely to rate their happiness with material goods by considering other people's possessions (Frank, 2005).2Second, experiences are more closely connected to the self and to one's identity (Carter & Gilovich, 2012;Thomas & Millar, 2013). For example, in a series of experiments, Carter and Gilovich (2012) showed that people kept their experiences physically closer to their self, mentioned their experiences more often in their life stories, stated that experiences portrayed more about a person's true self than material purchases, and were more reluctant to exchange their experiential memories.…”

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confidence: 99%

The association between experiential and material expenditures and subjective well-being: New evidence from Hungarian survey data

Hajdu

2017

Journal of Economic Psychology

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In the last decade, a number of experiments have stated that spending money on experiences rather than on material goods tends to make people happier. However, the experimental designs used to analyze the relationship between consumption and subjective well-being had several limitations: small and homogeneous samples, a direct question assessing the effect of consumption, and a potential social desirability bias due to the stigmatization of materialism.To reduce these limitations, we used a survey method. In two studies based on survey data from nationally representative samples in Hungary, we estimated linear and non-linear associations of experiential and material expenditures with life satisfaction. Although both experiential and material expenditures were positively associated with life satisfaction, evidence supporting the greater return received when buying experiences was limited. The main difference between experiential purchases and material purchases was that the marginal utility of experiential purchases appeared to be linear, whereas the marginal utility of material purchases was decreasing. Despite the limited differences between the effects of experiential and material purchases, the results of the non-linear estimates indicate that to maximize life satisfaction, an average person should allocate more money to buying experiences rather than material goods.Keywords: subjective well-being, life satisfaction, consumption, experiential purchase, A kutatások módszertanának azonban néhány olyan jellemzője van, ami az eredmények megbízhatóságát csökkenti: a minták kis elemszámúak és homogének, a vásárlások hatását direkt kérdéssel mérik, a materialista személyek negatív társadalmi megítélése miatt torzítottak lehetnek az eredmények. E problémák elkerülése érdekében az élmények és tárgyak vásárlásának szubjektív jólléttel való kapcsolatát kérdőíves adatok segítségével vizsgáljuk. Két magyar reprezentatív kérdőíves adatbázis segítségével lineáris és nem lineáris becsléseket végzünk. Az eredményeink szerint mind az élmények, mind pedig a tárgyak fogyasztása pozitívan korrelál az élettel való elégedettséggel, ugyanakkor az élmények erősebb hatására vonatkozó korábbi eredmények a magyar kérdőíves adatokon nem támaszthatóak alá egyértelműen. A nem lineáris becslések szerint az élmények és tárgyak vásárlása között a fő különbséget az jelenti, hogy előbbi esetben a marginális hatás konstans, míg utóbbi esetben szignifikánsan csökkenő. Ezekre az eredményekre építve azt is megmutatjuk, hogy egy átlagos személynek az élettel való elégedettséget maximalizáló optimális allokáció esetén többet kellene élményekre és kevesebbet tárgyakra költenie.Tárgyszavak: szubjektív jóllét, élettel való elégedettség, fogyasztás, élmények, tárgyak JEL kód: I31, D12 5 INTRODUCTIONA substantial section of the subjective well-being literature addresses the relationship between material welfare and satisfaction or happiness. Since the first study conducted by Easterlin (1974), numerous studies have tried to answer the same questio...

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“…Although this point seems fairly obvious, the processes that lead to social comparison and their implications for social welfare and individual well-being are still highly debated in the literature (Easterlin, 1995;Frank, 2005).…”

Section: Social Comparison and Happinessmentioning

confidence: 99%

Relative verbal intelligence and happiness

Nikolaev

McGee

2016

Intelligence

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Even though higher intelligence (IQ) is often associated with many positive outcomes in life, it has become a stylized fact in the happiness literature that smarter people are not happier than their less intelligent counterparts. In this paper, we examine how relative verbal intelligence correlates with happiness and present two main findings. First, our estimations from the General Social Survey for a large representative sample of Americans suggest a small, but positive and significant correlation between verbal intelligence and happiness. Second, we find that verbal intelligence has a strong positional effect on happiness, i.e., people who have greater verbal proficiency relative to their peers in their reference group are more likely to report higher levels of happiness. The positional effect of happiness holds even when we control for a large set of socio-economic characteristics as well as relative income.

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Positional Externalities Cause Large and Preventable Welfare Losses

Cited by 338 publications

References 2 publications

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

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

The association between experiential and material expenditures and subjective well-being: New evidence from Hungarian survey data

Relative verbal intelligence and happiness

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