Subjective Poverty and Reference-Dependence: Income over Time, Aspirations and Reference Groups
How a person assesses the wellbeing derived from income is often determined as much by its contrast with a reference point as by the level of income itself. In this paper, I use a household survey from Mexico to examine how subjective poverty assessments not only depend on the absolute level of income, but on how it compares to three reference points: the income of a reference group, the level of income that the individual aspired to have accomplished by the current stage of her life, and the income she had 3 years ago. I find that subjective poverty assessments evidence reference-dependence in the income domain relative to reference groups and aspirations, but not with respect to previous levels of income. Further, the results indicate that 'keeping up with the Joneses'' behaviour is a feature only of the upper-middle class, and that the inability to exceed income aspirations increases the probability of subjective poverty regardless of the individual's position in the income distribution.
Castilla, C. Subjective Poverty and Reference-Dependence: Income over Time, Aspirations and Reference Groups. UNU-WIDER, Helsinki, Finland (2010) 25 pp. ISBN 978-92-9230-314-3 [WIDER Working Paper No. 2010/76]