An Experimental Approach to the Relative Income Hypothesis

Abstract.  Subjective well-being (SWB) scholars have assembled substantial evidence from large observational datasets of a negative relationship between others’ income and own SWB.  This negative relationship is generally understood as evidence of the “relative income hypothesis” (RIH), according to which income comparisons cause SWB to decrease with others’ income, ceteris paribus. Identification of the RIH is confounded by numerous factors, (e.g., cost-of-living and selection). We directly test for the RIH in an economic experiment: we measure subjects’ SWB before and after a relative-reward shock (learning how many monetized experimental points they and another subject will receive) using the four-item Mood Short Form (MSF).  To distinguish between the impact of relative income and non-RIH (e.g., positional) concerns, we replicate the experiment using non-monetized points. We find that a negative relative-income shock reduces SWB, as predicted by RIH. The negative relative-points shock has a similar impact, suggesting that the SWB-effects of the negative relative-income shock may be due to non-RIH concerns.  In contradiction of RIH, the positive relative-income shock does not impact SWB, while the positive relative-points shock reduces SWB, suggesting that the positive relative-income shock may fail to impact SWB because of the offsetting effects of the positive relative-points shock and income.