A: you earn £50k, and others earn £25k
B: you earn £100k, and others earn £250k
In which world would you prefer to live?
I'm guessing that many of you will have chosen world A (or at least been very tempted to do so), despite the fact that you get 50% less cash than in world B. Indeed when Solnick and Hemenway (1998) first conducted this test with a group of Harvard graduates they found that half of respondents chose World A. (Read summary here)
What does this survey tell us? Well, it implies something that it is fairly obvious but which economist's seldom incorporate into their models: what people really care about is their income relative to other people's, rather than their absolute level of income per se.
The way in which we are envious of other people's income has begun to be more systematically examined. For example Blanchflower and Oswald (2004) use a large panel data set to estimate the impact of other people's income on an individual's self-reported happiness. They find that the negative effect on happiness of other people's income is about 30% of the positive effect of own income. That is, if your neighbour earns an extra £1, this event decreases your happiness by the same extent as a fall in your own income of 30p.
So to answer the question posed as the title of this Blog entry- my hypothesis is that a big part of the reason you want to be rich is not because you want to enjoy consuming goods in and of themselves (as standard economic theory suggests), but because you want to have more stuff than your mates- so you can parade around feeling like the big man.
As J.S Mill once wrote: Men do not desire to be rich, but to be richer than other men
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