Why Income Comparison is Rational

In many cultures a major factor affecting a person’s happiness is the gap between their income and their neighbors’ income, independent of their own income [Duesenberry, 1949, Luttmer, 2005, Easterlin, 1995, Neumark and Postlewaite, 1998, Stevenson and Wolfers, 2008, Frank, 1999, Frey and Stutzer, 2002, Fehr and Schmidt, 1999, Easterlin, 2003, Easterlin and Plangno, 2008, D’Ambrosio and Frick, 2007]. This effect is strongest when the neighbor has moderately higher income. In addition a person’s lifetime happiness tends to follow a “U” shape, with a minimum in the 40’s [Yang, 2008, Blanchflower and Oswald, 2007]. Previous models have separately explained some of these phenomena, typically by assuming the person has limited ability to assess their own (hedonic) utility [Robson, 2001, Netzer, 2008]. Here I present a model which explains all of the phenomena, and does not make such assumptions. In this model moderately greater income of your neighbor is statistical data that, if carefully analyzed, would recommend that you explore for a new income-generating strategy. This explains unhappiness that your neighbor has moderately greater income, as an emotional “prod” that induces you to explore, exactly in accord with the careful statistical analysis. It explains the “U” shape of happiness in a similar manner. A final benefit of this model is its many falsifiable predictions, e.g., concerning how the amounts of effort exerted by you and your neighbor to reach your current incomes affects your