Date of Award
Bachelor of Arts
economic, theory, income
Neoclassical economic theory asserts that individuals act independently in a utility maximizing manner. Recent literature modifies this theory and introduces a relative income or positional term in the utility function, making utility functions interdependent. The neoclassical theory views income as a non-positional good, whereas the modification views income as a positional good. Studies employing choice experiments through use of hypothetical surveys pose the Relative Income Question, which asks individuals to select between absolute or relative income. Many individuals exhibit a positional concern for income specifically. Individuals may consider various factors when evaluating their view on the positionality of income. A cognitive influence was first observed by Rand (2008), who found that individuals preferring absolute income scored significantly higher on cognitive ability tests compared to those preferring relative income. The focus of this study is to understand factors individuals may integrate in deciding whether they view income as a positional or non-positional good. The purpose of this paper is three-fold, to: (1) replicate the findings of the original relative income question experiment using new data; (2) evaluate whether relative income or absolute income is the more appropriate basis for economic models oriented towards policy making; (3) and investigate the relevance of a cognition argument in choosing between relative income and absolute income. The hypothesis is that individuals with relatively higher cognitive measure scores will select the absolute state as this is the more (economically) rational answer, as per the standard economic theory. It was found that the standard economic theory does not universally apply, supporting the importance and relevance of a relative income term in the utility function. However, individuals with higher scores on a measure of cognition tended view income as a non-positional good, complying with standard economic theory.
Keshwani, Najiba, "Positionality of Income: An Exploration of the Influence of Cognition" (2013). Honors Theses and Student Projects. 688.