No. 98: Keeping up with the Joneses and the Easterlin Paradox

Abstract

This paper analyses the relationship between relative income concerns and individual wellbeing in an economy of heterogeneous firm-worker pairs. Specifically, we study incentive contracting under moral hazard when workers compare their earnings with the economy’s average wage. At the aggregate level, we define the economy’s equilibrium and prove existence. We then analyse the impact of technological improvements and identify various channels through which an individualŠs wellbeing can be negatively affected by economy-wide income growth, to the extent that, consistent with the Easterlin Paradox, an increase in average earnings can result in stagnant or even reduced average expected utility for workers.

Participating Institutions

TRR 266‘s main locations are Paderborn University (Coordinating University), HU Berlin, and University of Mannheim. All three locations have been centers for accounting and tax research for many years. They are joined by researchers from LMU Munich, Frankfurt School of Finance and Management, WHU – Otto Beisheim School of Management, ESMT Berlin, Goethe University Frankfurt and Carl von Ossietzky University Oldenburg who share the same research agenda.