Relative Consumption, Social Exclusion, and Well-Being

Abstract

One of the most interesting ideas in social science is the notion that individuals are motivated by concerns about their relative position. Using cross-sectional data from six transition countries, Kazakhstan, Moldova, Macedonia, Serbia, Tajikistan and Ukraine, I build on previous studies that have examined the relationship between relative position and well-being. The main novelty is that various hypotheses are tested: the importance of own consumption, the contribution of relative consumption, the relevance of social exclusion, and the marginal contribution of relative social exclusion. Most importantly, I examine the significance of “reference group” in the relationship between relative consumption and well-being. First, I begin by replicating the previous studies by testing the hypothesis that self-reported well-being (SWB) depends on relative income, with the distinction that I use relative consumption, which at a conceptual level affects well-being, rather than relative income. The result supports the relative income hypothesis. I also find evidence that relative consumption exerts a positive influence on SWB, a finding which lends support to Hirschman’s “tunnel effect” conjecture. Second, I test whether households feel worse off when they are “socially excluded” in their reference group. I find that, accounting for a household’s own consumption and relative consumption, socially excluded households are associated with lover levels of SWB. Third, I investigate whether households feel worse off when there is greater degree of social exclusion in their reference group, which I call the effect of “social solidarity,” where individuals feel worse off when others around them are socially excluded. I find strong evidence for my conjecture. Finally, I examine the question of the relevant reference group, i.e. who belongs to the reference group of each household. Does it include all the households living in the same region, or district, or settlement, if the reference group is defined by geographical area? There is suggestive evidence that households compare themselves with others in their local as well as larger regions.