The relative income hypothesis: A comparison of methods

- Studies of the relative income hypothesis have found inconsistent effects.
- Use of a large UK household survey facilitates comparisons across methods.
- The relative income effect is sensitive to the definition of the reference group.
- The relative income effect is sensitive to the utility proxy and estimation method.

Studies of the relative income hypothesis find positive and negative effects of relative income. To facilitate comparisons we use a large household panel and highlight the sensitivity of the relative income effect to the definition of the reference group and to the estimation strategy employed.