Relativity, rank and the utility of income

Abstract

This is the accepted version of the following article: Rablen, M. D. (2008), Relativity, Rank and the Utility of Income. The Economic Journal, 118: 801–821, which has been published in final form at http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0297.2008.02143.x/abstract.Relative utility has become an important concept in several disjoint areas of economics. I present a cardinal model of income utility based on the supposition that agents care about their rank in the income distribution and that utility is subject to adaptation over time. Utility levels correspond to the Leyden Individual Welfare Function while utility differences yield a version of the prospect theory value function, thereby providing a new and shared derivation of each. I offer an explanation of some long-standing paradoxes in the wellbeing literature and an insight into the links between relative comparisons and loss aversion.ESR