Optimal Redistributive Taxation When Individual Welfare Depends Upon Relative Income

Boskin, Michael J.; Sheshinski, Eytan

doi:10.2307/1883177

“…For instance, see Cole et al (1992); Corneo and Jeanne (1997);. Boskin and Sheshinski (1978) and Oswald (1983) theoretically analyze tax policy implications of relative utility, while Abel (1990); Bakshi and Chen (1996); Gali (1994);and Campbell and Cochrane (1999) examined such relative effects on asset pricing. Frank (1985) and Frank (2005) show that relative concerns are more important for positional goods consumption than other goods such as leisure, and that the structure of utility functions with relative concerns over different types of goods is of key importance in the valuations of social welfare.…”

Section: Data Descriptionmentioning

confidence: 99%

The Relative Utility Hypothesis With and Without Self-Reported Reference Wages

Garza

¹

,

Mastrobuoni

²

,

Sannabe

³

et al. 2010

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis article uses survey data of 90,000 union employees working in 62 publicly-traded companies in Japan between 1990 and 2004 to study the effect of both own and self-reported reference wages on workers' subjective well-being levels. The availability of self-reported reference wages generates very robust findings that do not depend on questionable identifying assumptions. These findings confirm that higher estimates by workers of their peers' earnings are associated with lower levels of life and job satisfaction. These comparison effects are statistically and economically strong but are smaller in absolute value than the impact of workers' own wages on their own utility. We compare our results with standard tests of the relative utility hypothesis in the literature that recur to alternative proxies for comparison wages, including: (i) Mincer-predicted wages; (ii) cell averages defined over different groups within our dataset; (iii) cell wage averages estimated from an external data source; and (iv) colleagues' average wages. In spite of their potential flaws-that we discuss-these alternative empirical constructs employed in the literature do not introduce a simple classical measurement error problem and the bias attributed to this measurement error issue can go in both directions. We propose a simple IV strategy when the self-reported reference wage is not available that does not eliminate the bias but delivers a lower bound of the "true" effect. We also address the issue of endogeneity of self-reported reference wages in our subjective well-being regressions by accounting for workers' pessimistic attitudes at the workplace.

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“…k Example 3 clari®es that negative interdependence is something distinct from asserting that one's well-being is strictly decreasing in others' incomes. In other words, spite does not entail negative interdependence; our formalization of interdependent preferences is thus di¨erent from the usual formulation (such as in Boskin and Sheshinski 1978, Oswald 1983, Villar 1988and Galõ Â 1994. We note, however, that the concepts of negative interdependence and spite may turn out to be equivalent depending on the further restrictions one may wish to impose on the preference relation x.…”

Section: Examplesmentioning

confidence: 99%

“…Clearly, this preference relation would be represented on n by the utility function u aY y log a log a m aY y , and is thus a weighted average of independent and strongly relative preference relations (cf. Boskin andSheshinski, 1978, andTuomala, 1990). As gets smaller, the``independence'' of this particular preference relation increases, and as gets larger, the``relative income e¨ect'' becomes more pressing.…”

Section: Quasi-relative Preferencesmentioning

confidence: 99%

“…Yet the poor here are often said to be much less content with their lot than are the upper-middle class citizens of many poorer nations.'' 3 In the context of income taxation and public policy, for instance, the implications of the relative income hypothesis are analyzed by Boskin and Sheshinski (1978), Layard (1980), Oswald (1983), Ng (1987), Villar (1988), Blomquist (1993), and Mitra et al (1997). Related applications to the theory of asset pricing include Abel (1990) and Galõ Â (1994).…”

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Negatively interdependent preferences

Ok¹,

Koçkesen²

2000

Social Choice and Welfare

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Abstract. We develop a theory of representation of interdependent preferences that re¯ect the widely acknowledged phenomenon of keeping up with the Joneses (i.e. of those preferences which maintain that well-being depend oǹ`r elative standing'' in the society as well as on material consumption). The principal ingredient of our analysis is the assumption that individuals desire to occupy a (subjectively) better position than their peers. This is quite a primitive starting point in that it does not give any reference to what is actually regarded as``status'' in the society. We call this basic postulate negative interdependence, and study its implications. In particular, combining this assumption with some other basic postulates that are widely used in a number of other branches of the theory of individual choice, we axiomatize the relative income hypothesis, and obtain an operational representation of interdependent preferences.

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“…For example, in structuring optimal taxation, a desire for status calls for higher marginal taxes (Boskin and Sheshinski, 1978;Oswald, 1983;Blomquist, 1993;Aronsson and JohanssonStenman, 2008;Wendner and Goulder, 2008). Concerns about status and relative deprivation bear on labor supply (Neumark and Postlewaite, 1998), economic growth (Easterlin, 1974;Clark et al, 2008), poverty measurement (Sen, 1973), migration decisions (Stark and Taylor, 1991), and risk-taking behavior (Callan et al, 2008;Haisley et al, 2008).…”

Section: Resultsmentioning

confidence: 99%

A bitter choice turned sweet: How acknowledging individuals’ concern at having a low relative income serves to align utilitarianism and egalitarianism

Stark

¹

,

Jakubek

²

,

Kobus

³

2015

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWhen individuals' utility is a convex combination of their income and their concern at having a low relative income (the weights attached to income and to the concern at having a low relative income sum up to one), the maximization of aggregate utility yields an equal income distribution. This alignment of utilitarianism and egalitarianism is obtained for any number of individuals, and for general utility functions that are convex combinations of a power function of income and the concern at having a low relative income. The alignment can also hold when the weights sum up to a number different than one.

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Optimal Redistributive Taxation When Individual Welfare Depends Upon Relative Income

Cited by 352 publications

References 6 publications

The Relative Utility Hypothesis With and Without Self-Reported Reference Wages

The Relative Utility Hypothesis With and Without Self-Reported Reference Wages

Negatively interdependent preferences

A bitter choice turned sweet: How acknowledging individuals’ concern at having a low relative income serves to align utilitarianism and egalitarianism

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