DP6002 Subjective Welfare, Isolation and Relative Consumption

Author(s): Marcel Fafchamps , Forhad Shilpi

Publication Date: December 2006

Keyword(s): subjective well-being , relative deprivation , rivalry

JEL(s): I31 , O12

Programme Areas: Development Economics

Link to this Page: www.cepr.org/pubs/dps/DP6002.asp.asp

The recent literature has shown that subjective welfare depends on relative income. Attempts to test this relationship in poor countries have yielded conflicting results, suggesting that the relationship is not universal or only applies above a certain income level. We revisit the issue using data from Nepal. We find a relative consumption effect that is robust, strong in magnitude, and consistent across consumption expenditure categories. We find no evidence that poor households -- in a relative or absolute sense -- care less about relative consumption than more fortunate ones. Households residing far from markets care more -- not less -- about the consumption level of their neighbors, suggesting that market interaction is not what makes people care about relative consumption. Household heads having migrated out of their birth district still judge the adequacy of their consumption in comparison with households in their district of origin.