fatvegan

This is really interesting, if you can get through it. It's the conclusion of an econometric study on the influence neighbours' wealth has on a person's happiness. It found that the neighbour's income increasing reduced "self-reported happiness" by the same amount as an equivalent drop in a person's own income. Pretty amazing stuff.

This paper shows that increases in neighborhood earnings negatively affect self-reported happiness. By looking at alternative outcome measures, such as frequency of financial worries, I provide evidence that this finding is not simply an artifact of the way people report happiness. I investigate the concern that the finding could be driven by omitted variables, but find no evidence of selection in a number of specification tests including ones with individual fixed effects. Though the mechanism by which increases in neighbors’ earnings reduce happiness is hard to identify precisely, I provide suggestive evidence that interpersonal preferences are likely to be responsible for them. Increased neighbors’ earnings by and large reduce satisfaction with material (rather than immaterial) aspects of one’s life and have the strongest negative effect on happiness for those who socialize more in their neighborhood. I therefore conclude that the negative effect of neighbors’ earnings on well-being is real and that it is most likely caused by a psychological externality, i.e. people having utility functions that depend on relative consumption in addition to absolute consumption.

The size of the effect is economically meaningful. An increase in neighbors’ earnings and a similarly sized decrease in own income each have roughly about the same negative effect on well-being. This suggests that an increase in own income leads to a negative externality on neighbors’ well-being that is of the same order of magnitude as the positive effects on own well-being. Unless one chooses to disallow these negative externalities on ground that they appear to stem from an interpersonal preference component that is morally questionable, externalities of this size in principle offer considerable food for thought for the design of policies.

Erzo Luttmer