Economic theory assumes that individuals, all else equal, prefer being wealthy rather than poor, so that they experience more “utility” from having more money. There is a large literature on determinants of subjective well-being – or ‘happiness’ – showing that this positive relationship with own income is, at least on average, true. There is, however, another factor that influences how satisfied people are with their material goods.
“Keeping up with the Joneses” is a widely used idiom describing the comparison of people’s own material goods to those of their neighbors. In other words, while you may prefer more income to less income, your neighbor’s income may also help determine just how satisfied you are with your own level of wealth. Having a Porsche in your driveway may be enjoyable in itself, but much more so if your neighbor drives a Volkswagen.
A burgeoning literature investigates the extent to which self-reported well-being is negatively related to the income of others. In many of the empirical studies, the assumption is that the incomes that matter are those of other individuals or households in the same geographical area. Overall, this body of work finds very different outcomes on the effect of people’s reference group. Few surveys have asked individuals who they compare to, making the assumption that they might be most likely to compare to their neighbors necessary.
In our paper ”Who are the Joneses?“, we investigate this assumption and try to find out who the Joneses really are. Using the American Life Panel, a nationally representative panel of respondents who regularly answer questions over the Internet, we ask respondents how much they compare themselves to different groups, such as family and friends, coworkers, people their same age, neighbors on the same street, people in their town, people in the US, and people in the world. Respondents were also asked to identify how these comparisons might be different for different aspects of their lives, in particular their health, the number of friends they have, their family life, job situation, and of course, household income. Finally, we used two different measures of subjective well-being: one’s happiness and one’s satisfaction with income.
According to our results, the Joneses are not your neighbors, but rather individuals in your inner circle. We find respondents to be much more likely to compare their income to the incomes of their family and friends, their coworkers and people their age than to people living in the same street, town, the US, or the world. This finding suggests that studies that assume that we evaluate our incomes by comparing to others in the same geographic area are probably misleading. When investigating the relative income hypothesis, we should not be defining reference groups a priori. The only way to know who people compare themselves to may be to ask them directly, as we have done in this study. At the end of the day, what matters for subjective well-being are people’s own perceptions