The Negative Externality of Peer Group Income: Evidence from Three Developed Economies

Abstract: This paper examines the effect of peer group household income on happiness in three developed economies: the United States, Germany, and the United Kingdom, where we define peer groups by age, gender, and education. Using the most recent panel waves from the General Social Survey (GSS) and the European Social Survey (ESS), we find comparable results from all three countries, namely a negative coefficient of peer group household income that is statistically not different in absolute magnitude from the coefficient of the respondent’s own household income. We find that this result is robust to an array of control variables, alternative estimators (including fixed effects), and income specification (linear vs. logarithmic). We interpret this as a possible explanation for the Easterlin Paradox because our estimates indicate that an equal increase in one’s own household income and comparison household income (peer group income) leads to a zero-net gain in happiness.