Self-Evaluation of Economic Status and Reference Group

Formalization with Closed Intervalδ Model

Abstract

According to national statistical surveys, subjective satisfaction of economic status and individual income often does not accurately reflect the objective situation. Although it is known that objective income distribution is positively skewed and can be approximated to lognormal distribution, the degree of satisfaction with income is relatively high when compared to the objective situation.
In this paper, I attempt to construct a simple model that provides theoretical solution to the following question, that is, despite the fact that most people in society belong to the lower income stratum, why are they often found to be satisfied with their economic status and income level? My model takes into account important concepts in sociology such as reference group and relative deprivation/gratification.
The theoretical assumption is that, each individual evaluates his/her satisfaction level by comparing his/her income against a reference group selected from within the same income stratum. Analyses lead to the following implications. First, the broader the scope by which people select their reference group, the higher the possible degree of satisfaction. Second, in the low-income stratum, the broader the selection scope, the more one experiences a sense of relative deprivation. Third, in the high-income stratum, the broader the selection scope, the more one experiences relatively satisfaction. Fourth, the highest income earner does not necessarily experience the highest degree of satisfaction. Fifth, as the logarithmic mean of the income distribution increases, the satisfaction levels decrease as a whole.