Skip to main content

Inequality, happiness and relative concerns: What actually is their relationship?

Abstract

This paper briefly and informally surveys different theoretical models of relative concerns and their relation to inequality. Models of inequity aversion in common use in experimental economics imply a negative relation between inequality and happiness. In contrast, empirical studies on happiness typically employ models of relative concerns that assume that increases in others’ income always have a negative effect on own happiness. However, in these latter models, the relation between inequality and happiness can be positive. One possible solution is a rivalry model where a distinction is made between endowment and reward inequality which have respectively a negative and positive effect on happiness. These different models and their contrasting results may clarify why the empirical relationship between inequality and happiness has been difficult to establish.

This is a preview of subscription content, access via your institution.

References

  1. 1.

    Abel, A.B.: Asset pricing under habit formation and catching up with the Joneses. Am. Econ. Rev. 80(2), 38–42 (1990)

    Google Scholar 

  2. 2.

    Alesina, A., di Tella, R., MacCulloch, R.: Happiness and inequality: are Europeans and Americans different? J. Public Econ. 88, 2009–2042 (2004)

    Article  Google Scholar 

  3. 3.

    Becker, G.S., Murphy, K.M., Werning, I.: The equilibrium distribution of income and the market for status. J. Polit. Econ 113(2), 282–310 (2005)

    Article  Google Scholar 

  4. 4.

    Blanchflower, D., Oswald, A.: Well-being over time in Britain and the USA. J. Public Econ. 88, 1359–1386 (2004)

    Article  Google Scholar 

  5. 5.

    Blanco, M., Engelmann, D., Normann, H.: A within-subject analysis of other-regarding preferences (2007, working paper)

  6. 6.

    Boskin, M.J., Sheshinski, E.: Optimal redistributive taxation when individual welfare depends upon relative income. Q. J. Econ. 92(4), 589–601 (1978)

    Article  Google Scholar 

  7. 7.

    Brown, G.D.A., Gardner, J., Oswald, A., Qian, J.: Does wage rank affect employees’ wellbeing? Ind. Relat. (2004, forthcoming)

  8. 8.

    Charness, G., Rabin, M.: Understanding social preferences with simple tests. Q. J. Econ. 117, 817–869 (2002)

    Article  Google Scholar 

  9. 9.

    Clark, A.E.: Inequality-Aversion and income mobility: a direct test. DELTA, Paris (2003, working paper)

  10. 10.

    Clark, A.E., Frijters, P., Shields, M.A.: Relative income, happiness and utility: an explanation for the easterlin paradox and other puzzles. J. Econ. Lit. (2007, forthcoming)

  11. 11.

    Clark, A.E., Oswald, A.J.: Satisfaction and comparison income. J. Public Econ. 61, 359–381 (1996)

    Article  Google Scholar 

  12. 12.

    Clark, A.E., Oswald, A.J.: Comparison-concave utility and following behavior in social and economic settings. J. Public Econ. 70, 133–155 (1998)

    Article  Google Scholar 

  13. 13.

    Cole, H.L., Mailath, G.J., Postlewaite, A.: Social norms, savings behavior, and growth. J. Polit. Econ. 100(6), 1092–1125 (1992)

    Article  Google Scholar 

  14. 14.

    Corneo, G.: The efficient side of progressive income taxation. Eur. Econ. Rev. 46, 1359–1368 (2002)

    Article  Google Scholar 

  15. 15.

    Corneo, G., Jeanne, O.: On relative wealth effects and the optimality of growth. Econ. Lett. 54, 87–92 (1997)

    Article  Google Scholar 

  16. 16.

    Corneo, G., Jeanne, O.: Social organization, status and savings behavior. J Public Econ. 70, 37–51 (1998)

    Article  Google Scholar 

  17. 17.

    Dasgupta, I., Kanbur, R.: Community and class antagonism. J. Public Econ. 91, 1816–1842 (2007)

    Article  Google Scholar 

  18. 18.

    Deaton, A.: Health, inequality and economic development. J. Econ. Lit. 41(1), 113–158 (2003)

    Article  Google Scholar 

  19. 19.

    Duesenberry, J.S.: Income, Saving and the Theory of Consumer Behavior. Harvard University Press (1949)

  20. 20.

    Easterlin, R.: Does economic growth improve the human lot? In: David, P.A., Reder, M.W. (eds.) Nations and Households in Economic Growth (1974)

  21. 21.

    Fehr, E., Schmidt, K.: A theory of fairness, competition, and cooperation. Q. J. Econ. 114, 817–868 (1999)

    Article  Google Scholar 

  22. 22.

    Fliessbach, K., et al.: Social comparison affects reward-related brain activity in the human ventral striatum. Science 318, 1305–1308 (2007)

    Article  Google Scholar 

  23. 23.

    Frank, R.H.: The demand for unobservable and other positional goods. Amer. Econ. Rev. 75(1), 101–116 (1985)

    Google Scholar 

  24. 24.

    Frank, R.H.: The frame of reference as a public good. Econ. J. 107, 1832–1847 (1997)

    Article  Google Scholar 

  25. 25.

    Frank, R.H.: Luxury Fever: Why Money Fails to Satisfy in an Era of Excess. Free Press, New York (1999)

    Google Scholar 

  26. 26.

    Frey, B., Stutzer, A.: What can economists learn from happiness research? J. Econ. Lit. 40, 402–435 (2002)

    Article  Google Scholar 

  27. 27.

    Friedman, D.: Conspicuous consumption dynamics. Games Econ. Behav. (2005, forthcoming)

  28. 28.

    Futagamia, K., Shibata, A.: Keeping one step ahead of the Joneses: status, the distribution of wealth, and long run growth. J. Econ. Behav. Organ. 36, 109–126 (1998)

    Article  Google Scholar 

  29. 29.

    Galí, J.: Keeping up with the Joneses: consumption externalities, portfolio choice, and asset prices. J. Money, Credit Bank. 26(1), 1–8 (1994)

    Article  Google Scholar 

  30. 30.

    Graham, C., Felton, A.: Inequality and happiness: insights from Latin America. J. Econ. Inequal. 4, 107–122 (2006)

    Article  Google Scholar 

  31. 31.

    Harbaugh, R.: Falling behind the Joneses: relative consumption and the growth-savings paradox. Econ. Lett. 53, 297–304 (1996)

    Article  Google Scholar 

  32. 32.

    Hopkins, E., Kornienko, T.: Running to keep in the same place: consumer choice as a game of status. Amer. Econ. Rev. 94(4), 1085–1107 (2004)

    Article  Google Scholar 

  33. 33.

    Hopkins, E., Kornienko, T.: Which inequality? The inequality of endowments versus the inequality of rewards (2007, working paper)

  34. 34.

    Ireland, N.J.: Optimal income tax in the presence of status effects. J. Public Econ. 81, 193–212 (2001)

    Article  Google Scholar 

  35. 35.

    Kanbur, R., Pirttilä, J., Tuomala, M.: Non-welfarist optimal taxation and behavioural public economics. J. Econ. Surv. 20(5), 849–868 (2006)

    Article  Google Scholar 

  36. 36.

    Kornienko, T.: A cognitive basis for cardinal utility (2004, working paper)

  37. 37.

    Layard, R.: Human satisfactions and public policy. Econ. J. 90, 737–750 (1980)

    Article  Google Scholar 

  38. 38.

    Layard, R.: Happiness: Lessons from a New Science. Penguin (2005)

  39. 39.

    List, J.: The behavioralist meets the market: measuring social preferences and reputation effects in actual transactions. J. Polit. Econ. 114(1), 1–37 (2006)

    Article  Google Scholar 

  40. 40.

    Luttmer, E.F.P.: Neighbors as negatives: relative earnings and well-being. Q. J. Econ. 120(3), 963–1002 (2005)

    Article  Google Scholar 

  41. 41.

    Marmot, M.: Status Syndrome. Bloomsbury, London (2004)

    Google Scholar 

  42. 42.

    Parducci, A.: Category judgment: a range-frequency model. Psych. Rev. 72, 407–18 (1965)

    Article  Google Scholar 

  43. 43.

    Postlewaite, A.: The social basis of interdependent preferences. Eur. Econ. Rev. 42, 779–800 (1998)

    Article  Google Scholar 

  44. 44.

    Rayo, L., Becker, G.S.: Evolutionary efficiency and happiness. J. Polit. Econ. 115(2), 302–337 (2007)

    Article  Google Scholar 

  45. 45.

    Robson, A.: Status, the distribution of wealth, private and social attitudes to risk. Econometrica 60(4), 837–857 (1992)

    Article  Google Scholar 

  46. 46.

    Samuelson, L.: Information-based relative consumption effects. Econometrica 72, 93–118 (2004)

    Article  Google Scholar 

  47. 47.

    Shaked, M., Shanthikumar, G.J.: Stochastic Orders. Springer, New York (2007)

    Google Scholar 

  48. 48.

    Stewart, N., Chater, N., Brown, G.D.A.: Decision by sampling. Cogn. Psychol. 53, 1–26 (2006)

    Article  Google Scholar 

  49. 49.

    Thistle, P.D.: Ranking distributions with generalized Lorenz curves. South. Econ. J. 56, 1–12 (1989)

    Article  Google Scholar 

  50. 50.

    Weisbach, D.A.: What does happiness research tell us about taxation? University of Chicago (2007, working paper)

  51. 51.

    Wilkinson, R.G., Pickett, K.E.: Income inequality and population health: a review and explanation of the evidence. Soc. Sci Med. 62, 1768–1784 (2006)

    Article  Google Scholar 

  52. 52.

    Yitzhaki, S.: Relative deprivation and the gini coefficient. Q. J. Econ. 93, 321–324 (1979)

    Article  Google Scholar 

Download references

Author information

Affiliations

Authors

Corresponding author

Correspondence to Ed Hopkins.

Additional information

I would like to thank Ravi Kanbur, Tatiana Kornienko and, especially, Andrew Oswald for very helpful comments. Any errors are mine.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Hopkins, E. Inequality, happiness and relative concerns: What actually is their relationship?. J Econ Inequal 6, 351–372 (2008). https://doi.org/10.1007/s10888-008-9081-4

Download citation

Keywords

  • Inequality
  • Relative position
  • Social preferences
  • Tournaments
  • Evolution