relative wealth

Cornell economist Robert Frank, author of Luxury Fever, has made a persuasive case that relative wealth - the size of my pie compared to my neighbor's - is an important determinant of our utility. He offered survey respondents a choice between two worlds: (a): You earn $110,000 and everyone else earns $200,000. Or (B): You earn $100,000 and everyone else earns $85,000. As he explains, "The income figures represent real purchasing power. Your income in World A would command a house 10 percent larger than the one you could afford in World B, 10 percent more restaurant dinners and so on. By choosing World B, you'd give up a small amount of absolute income in return for a large increase in relative income." You would be richer in World A; you would be less wealthy in World B but richer than everyone else. Which scenario would make you happier? Mr. Frank found that a majority of Americans would choose B. In other words, relative income does matter. Envy may be part of the explanation. It is also true, Mr. Frank points out, that in complex social environments we seek ways to evaluate our performance. Relative wealth is one of them.


Charles Wheelan. Naked Economics: Undressing the Dismal Science by Charles Wheelan. W.W. Norton & Company. 2002. P.114