Working Paper 2010-155
The paper focuses on satisfaction with income and proposes a utility model built on two value systems, the `Ego’ system – described as one own income assessment relatively to one own past and future income – and the `Alter’ system – described as one own income assessment relatively to a reference group. We show how the union of these two value systems and the use of relative deprivation measures can lead to a model able to accommodate a wide range of theories on income and happiness. The model is then tested using the Consortium of Household Panels for European Socio-economic Research (CHER), a collection of 19 panel surveys including over 1.2 m. individual observations. We find absolute income to sit at the intersection between the `Ego’ and the `Alter’ systems and to play the most prominent role in explaining satisfaction with income. Relative deprivation is also found to be important for understanding the income-happiness nexus while we find income expectations to be less relevant once we control for absolute income. Overall, the `Alter’ system (the cross-section comparison with others) seems to be more relevant in valuing income than the `Ego’ system (the longitudinal self-comparison of income).
Authors: Paolo Verme .