Happiness, Deprivation and the Alter Ego

The paper focuses on satisfaction with income and proposes a utility model built on two value systems, the 'Ego' system - described as one own income assessment relatively to one own past and future income - and the 'Alter' system - described as one own income assessment relatively to a reference group. We show how the union of these two value systems and the use of relative deprivation measures can lead to a model able to accommodate a wide range of theories on income and happiness. The model is then tested using the Consortium of Household Panels for European Socio-economic Research (CHER), a collection of 19 panel surveys including over 1.2 m. individual observations. We find absolute income to sit at the intersection between the 'Ego' and the 'Alter' systems and to play the most prominent role in explaining satisfaction with income. Relative deprivation is also found to be important for understanding the income-happiness nexus while we find income expectations to be less relevant once we control for absolute income. Overall, the 'Alter' system (the cross-section comparison with others) seems to be more relevant in valuing income than the 'Ego' system (the longitudinal self-comparison of income).