Relativizing Relative Income

Using over one million observations, from 6 Transition countries and 14 "old" European countries, we show that, in stable EU economies, other people's income affects my utility directly, through comparison effects, whereas in more volatile Transition economies it affects me indirectly, in a cognitive manner. Empirically, using mostly panel data, we show that the average income in one's professional group affects individual subjective well-being negatively in EU countries, whereas the correlation is positive in Transition economies. In Poland, for which we have particularly long panel data, the relative importance of these effects is reversed with the beginning of transition: Comparison effects dominate until 1989 whereas information effects are predominant from 1990 onwards. This divergent attitude towards other people's income is potentially important at a time of ongoing European enlargement. More generally, the results lead to a relativization of the relative income hypothesis, which is at the heart of certain critical views of growth policies