The Influence of Perceived Relative Income on Social Behavior and Happiness

Recent research suggests that individuals who believe they earn more than their peers are inclined to spend more time socializing with them, leading to greater overall happiness.

Study Overview

A February NBER working paper explored the relationship between perceived relative income, social behavior, and happiness. Conducted by Bernardo Candia Gonzalez and his colleagues, the study involved nearly 2,700 adult respondents in the Netherlands. Participants were surveyed about their demographic information and perceptions of their peers’ income levels.

Key Findings

The study revealed that individuals who perceived themselves to have a higher income than their peers tended to spend more time socializing in recreational settings. This increased socialization did not significantly impact participation in political or civic organizations. However, there was evidence suggesting that those with a higher relative income became more engaged in sports and community events.

Gender and Demographic Differences

Women tended to perceive their income as lower compared to men, while employed individuals, those living with a partner, and homeowners perceived their income as higher. Interestingly, education and age did not significantly influence income perception, although older households viewed their peers as having more debt.

Impact on Happiness

Believing in a higher relative income was associated with increased happiness, irrespective of changes in spending patterns or beliefs about income redistribution. However, learning about the debt of peers did not affect happiness levels significantly.

Influence on Spending Behavior

Individuals who perceived themselves as earning less than their peers were more likely to spend on durable goods to maintain a perception of socioeconomic stability, a phenomenon commonly known as “keeping up with the Joneses.” Conversely, those with higher perceived income spent less on non-durable goods and services.

Conclusion

The study highlights the complex interplay between perceived relative income, social behavior, and happiness. Understanding these dynamics can offer insights into how individuals navigate social interactions and financial decisions in response to their perceptions of others’ income levels.