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

Year: 2022
Type: Working Paper
Open Science:


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 individual’s 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, Goethe University Frankfurt, WHU – Otto Beisheim School of Management and University of Cologne who share the same research agenda.

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