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Department ofEconomics


The relative income effect: an experiment

John Ifcher, Homa Zarghamee, Dan Houser, and Lina Diaz

Experimental Economics 23, pp 1205–1234, March 2020

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John Stuart Mill claimed that “men do not desire merely to be rich, but richer than other men.” Are people made happy by being richer than others? Or are people made happy by favorable comparisons to others more generally, and being richer is merely a proxy for this ineffable relativity? We conduct an online experiment absent choice in which we measure subjective well-being (SWB) before and after an exogenous shock that reveals to subjects how many experimental points they and another subject receive, and whether or not points are worth money. We find that subjects are made significantly happier when they receive monetized rather than non-monetized points, suggesting money is valued more than the points it represents. In contrast, subjects are made equally unhappy when they receive fewer monetized points as when they receive fewer non-monetized points than others, suggesting relative money is not valued more than the relative points it represents. We find no evidence that subjects are made happier by being “richer” than others (i.e., by receiving more points—either monetized or non-monetized—than others). Subgroup analyses reveal women are made unhappier (than men) by being “richer” and “poorer” than others, and conservatives are made unhappier (than progressives) by being “poorer” than others. Our experimental-SWB approach is easy to administer and may complement choice-based tasks in future experiments to better estimate preference parameters.

LSB Research, ECON, John Ifcher, 2020