Life Satisfaction, Income Comparisons and Individual Traits

Authors: Santi Budria and Ada Ferrer-i-Carbonell

Review of Income and Wealth, December, 2018

People gain utility from occupying a higher ranked position in the income distribution of the reference group. This paper investigates whether these gains depend on an individual's set of personality and affective traits. Using the 2000 to 2013 waves of the German Socio-economic Panel dataset (SOEP), a subjective question on Life Satisfaction, and three different measures of personal and affective traits, we find significant and robust differences across groups and conclude that traits determine the relationship between rank and life satisfaction. The heterogeneity on the importance of income comparisons is relevant, for example, when building economic models, predicting individuals' behavior, or making welfare judgments.

This paper originally appeared as Barcelona GSE Working Paper 733