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Choosing the Joneses: On the Endogeneity of Reference Groups


Falk, Armin; Knell, Markus (2000). Choosing the Joneses: On the Endogeneity of Reference Groups. Working paper series / Institute for Empirical Research in Economics No. 53, University of Zurich.

Abstract

"A growing economic literature recognizes and deals with the fact that economic agents' utility and well-being is not solely determined by absolute achievements, but also by achievements relative to a reference standard or reference group. In this literature it is assumed that the reference standard is completely exogenous. Social psychologists have questioned the exogenous nature of the comparison process (""forced comparison conception"") and have emphasized that people play a more active role in the determination of their reference standards (""coping approach""). The present paper takes up this idea. In our model the reference standard is determined endogenously. Following the social comparison literature we assume that in choosing the optimal reference standard people pursue goals of self-improvement and self-enhancement. Our model predicts that the optimally chosen reference standard (or group) increases in people's abilities. We present new questionnaire data together with a review of various important findings from social perception studies (minimum income, happiness, subjective social class). It turns out that the empirical regularities conform well to the predictions of our model, but are difficult (if not impossible) to explain by both the standard economic approach (with its neglect of social comparison) and the forced comparison approach. "

Abstract

"A growing economic literature recognizes and deals with the fact that economic agents' utility and well-being is not solely determined by absolute achievements, but also by achievements relative to a reference standard or reference group. In this literature it is assumed that the reference standard is completely exogenous. Social psychologists have questioned the exogenous nature of the comparison process (""forced comparison conception"") and have emphasized that people play a more active role in the determination of their reference standards (""coping approach""). The present paper takes up this idea. In our model the reference standard is determined endogenously. Following the social comparison literature we assume that in choosing the optimal reference standard people pursue goals of self-improvement and self-enhancement. Our model predicts that the optimally chosen reference standard (or group) increases in people's abilities. We present new questionnaire data together with a review of various important findings from social perception studies (minimum income, happiness, subjective social class). It turns out that the empirical regularities conform well to the predictions of our model, but are difficult (if not impossible) to explain by both the standard economic approach (with its neglect of social comparison) and the forced comparison approach. "

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Institute for Empirical Research in Economics (former)
Dewey Decimal Classification:330 Economics
Language:English
Date:July 2000
Deposited On:29 Nov 2011 21:26
Last Modified:12 Aug 2017 12:49
Series Name:Working paper series / Institute for Empirical Research in Economics
ISSN:1424-0459
Official URL:http://www.econ.uzh.ch/wp.html

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