Sunday, June 29, 2014

28/6/2014: Who are the Joneses?

Dahlin, Maria Björnsdotter and Kapteyn, Arie and Tassot, Caroline paper "Who are the Joneses?" (June 2014. CESR-Schaeffer Working Paper No. 2014-004. attempts to answer a very important question in economics of individual perceptions and referencing of own well-being relative to well-being of others. The study tackles an issue that forms the core of a number of macroeconomic models, but also of relevance to the active debate about relative poverty and relative incomes.

"A burgeoning literature investigates the extent to which self-reported well-being (or happiness) or satisfaction with income is negatively related to the income of others" or the Joneses. "In many of the empirical studies, the assumption is that the incomes that matter are those of other individuals or households in the same geographical area." In other words - physical proximity is of the matter.

"In an experiment conducted in the American Life Panel, we elicit the strength of comparison with different groups, including neighbors, individuals of similar age and coworkers."

Fascinating findings emerged:

  1. "Individuals are much more likely to compare their income to the incomes of their family and friends, their coworkers and people their age than to people living in the same street, town, in the US, or in the world." In other words, we reference our own well-being against well-being of those close to us socially and family-wise, not those who physically live near us, but are strangers to us. A relatively rich uncle may be inducing greater dissatisfaction onto us, than a filthy rich neighbour. In which case, were relative poverty be a concern, taxing family members on higher incomes is better than taxing everyone on higher incomes. Which, of course, would be an absurd policy.
  2. "…we find both at the zip code and at the PUMA geographic level that own income or rank in the local income distribution matter for happiness and satisfaction with income, but incomes in the same geographic region do not influence own happiness when controlling for own income."  
  3. "When asking respondents directly for how they rate the position of own and others’ income we find that higher estimates of neighbors’ income are negatively related with satisfaction with own income. Additionally, respondents who compare more intensively with their neighbors perceive the difference between their own income and that of their neighbors to be larger." So we do rate strangers' income relative to our own. Just not as much as we rate relatives' and friends' income relative to our own.
  4. "Using age-based reference groups instead of geography-based reference groups, we find a consistent negative effect of the log median income and the perceived income in an individuals’ age group". In other words, the Joneses that we 'benchmark' ourselves against are more likely to be those from similar/shared cohort, in this case - cohort by age. The old do not begrudge, as much, the young, but they do begrudge other old.

"Overall, these results indicate that comparisons with neighbors may not be the most important channel through which perception of others’ income impacts one’s own well-being."

In other words, relative benchmarking matters, but it strength varies with familial and social ties, and matters less in terms of proximity. As I noted, half-jokingly, above: a richer uncle induces more negative referencing even if he lives in a distant community, than a richer neighbour who flaunts her/his wealth in our face. 
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