Do People Care About Relative Income?

This paper investigates whether people’s satisfaction declines when the income of their peer group rises. We try to answer this question by applying an extensive panel data study covering the European Union. Our empirical model provides three main findings. First, we find that higher comparison income is associated with lower self-reported satisfaction, and that the effect is robust for various re-specifications of the model. Second, we find that the income externality is asymmetric. Third, we find suggestive evidence that the effect is only significant for people who socialize frequently.