Reference Group Effects You: A New Model and a Laboratory Experimental Analysis

Abstract

This paper proposes a new relative income model that people choose their own reference group endogenously. This model assumes 1) the reference group effects one's performance, 2) people can be divided in two types by the direction of the effects; those who are improved their performance by the higher reference group or not. By the laboratory experiment, it shows that this model can provide a good description of the participants' behavior.