The Effect of Relative Income Concerns on Life Satisfaction: Relative Deprivation and Loss Aversion

Abstract Income comparisons are important for individual well-being. We examine the shape of relationship between relative income and life satisfaction, test empirically if features value function prospect theory carry over to experienced utility. draw on a unique panel dataset middle-income country that allows us work with an endogenous reference income, which differs individuals same observable characteristics depending perception error about their position in distribution. find utility be concave both positive and, at odds theory, also negative income. Loss aversion holds only incomes sufficiently distant from Our heterogeneity analysis shows slope is contingent people’s personality, social beliefs, how much they care comparisons.