On relative income and life datisfaction: The moderating role of GDP per capita, culture and income inequality

In his seminal book ‘Social limits to growth’ Hirsch argues that the importance of positional goods (those things of which the value depends on how much other people own) increases with economic welfare. This would suggest that relative income affects subjective well-being more in rich countries than in poor countries. This paper tests this hypothesis by analysing the effect of relative income on life satisfaction in 101 countries using a comprehensive dataset from the Integrated World Values Survey and the World Bank. The results contradict the hypothesis of Hirsch: life satisfaction in rich countries is less affected by relative income and more affected by absolute income than in poor countries. The results are robust when splitting the sample into four sub samples for high, middle-high, middle-low-, and low-income countries, using alternative measures of relative income, tests for over-control bias, and bounds analysis. Delving into factors that explain these results, we find that national culture, measured by individualism and generalized trust, negatively and income inequality positively moderate the relationship between relative income and life satisfaction.