Does Meeting Expectations of Relative Income Improve Well-Being?

Abstract

In recent years economists began studying subjective well-being thoroughly, and often find a certain set of variables affect subjective well-being. Relative income is one variable which is regularly found to strongly influence subjective well-being in many different settings around the world. This study investigates whether or not meeting one’s expectations for relative income change affects subjective well-being by taking advantage of individual level panel survey data from South Africa. A fixed effects model is used to eliminate unobservable fixed effects and estimate the effect of moving from the ‘met expectations’ category in time period one, to ‘below expectations’ or ‘above expectations’ in time period two. Falling below expectations significantly reduces subjective well-being in comparison to meeting expectations. Exceeding expectations improves subjective well-being compared to meeting expectations. Meeting our relative income expectations is nearly as important as being healthy, and exceeding those expectations almost doubles the benefit