Relative Comparisons and Economics : Empirical Evidence

For most people, the idea that individuals compare themselves to others in determining their own utility, that is, their sense of happiness or well-being, rings true. Memories from the school yard, the neighborhood, and the workplace support the notion that we care both about our own accomplishments and how they stack up against those of others.While economists are not immune to such interpersonal comparisons, these ideas have been slow to diffuse into mainstream utility theory. An important barrier to widespread adoption of relative comparisons into standard utility models is the lack of convincing empirical research on the topic. Despite growing interest and work in the field, there remains a notable gap between our commonsense acceptance of the idea and what we can find and re-find in the data. One reason for this gap is that economists looking at relative comparison questions have mostly been limited to two types of data: data generated from classroom/laboratory experiments and the results of subjective surveys of happiness or life satisfaction. While innovative and useful, these types of data are subject to two important criticisms: experiments, by their nature, are contrived and typically limited to very small samples; and, self-reported happiness surveys, while capturing much larger samples, elicit responses that are subjective and may be difficult to compare across individuals and over time.These criticisms of the data have limited somewhat the widespread acceptance of research findings based on them.That said, the results from these studies are intriguing and have captured the interest of numerous economists and policymakers in the U.S. and internationally. In this Economic Letter we review the empirical evidence on the extent to which individuals' sense of well-being or happiness is related to metrics of the well-being of others.We first discuss the key findings that emerge from previous empirical research and then present new evidence based on the relationship between relative incomes and the incidence of suicides. Relative position: Theory and evidence Despite common experiences of social comparisons , conventional economic theory assumes that individual utility is independent of the economic status of others. Still, economists have long considered the possibility that relative status matters. Several theories spell out the mechanisms by which preferences might be interdependent, e.g.,Veblen's (1899) " conspicuous consumption, " Duesenberry's (1949) " keeping up with the Joneses, " and Easterlin's (1974) " aspiration theory. " Common to each of these ideas is the notion that individuals care about their …