A model of income evaluation: income comparison on subjective reference income distribution

Abstract

ABSTRACT People’s evaluation of the relative position of their income is not as accurate as the relative income hypothesis assumes. It is observed from empirical survey data that income evaluation is concentrated in the middle. We develop a model that assumes income comparison on a subjective income reference distribution to explain the centralization phenomenon of income evaluation. We conduct theoretical analysis and empirical parameter estimation using Bayesian statistical modeling. The theoretical analysis shows that the centralization of income evaluation distribution occurs when the subjective reference distribution is more dispersed than the objective distribution. Empirical analysis using Japanese data from 2015 shows that the relationship between subjective and objective distributions differed depending on social categories with different social experiences. Women had a more ambiguous distribution than men. Among men, those aged 45–54 had a subjective distribution closest to the objective distribution. Thus, the subjective reference income distributions that potentially define people’s evaluation of their income and their differences based on social category were only clarified by constructing the model.