DP4459 Choosing the Joneses: Endogenous Goals and Reference Standards

Author(s): Armin Falk, Markus Knell
Publication Date: June 2004
Keyword(s): goals, happiness, reference standards, social comparison
JEL(s): D62, D63, H31
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4459

A growing economic literature stresses the importance of relative comparisons, e.g., for savings and consumption or happiness. In this literature it is usually assumed that reference standards against which people compare themselves are exogenously given. In contrast, findings from social psychology suggest that people play an active role in determining their reference standards. We present a social comparison model where people choose their reference standards to serve motives of self-improvement and self-enhancement. The model predicts that reference standards increase in individuals? abilities and that people therefore tend to compare themselves to similar others. The results of a questionnaire study confirm the model?s prediction.