The Relative Income Hypothesis: A comparison of methods

Empirical studies of the relative income hypothesis have found both positive and negative effects of relative income on utility. Differences in data and methods make the results difficult to compare. To facilitate comparisons we explore the problem using a large UK household panel. Our findings highlight the sensitivity of the estimated relative income effect to the definition of the reference group and to the estimation strategy employed. Given the increasing attention paid to interdependent preferences in the economics literature, and the implications for problems such as the measurement of societal welfare, our findings are of interest for both the theoretical and empirical study of the relative income hypothesis.