Subjective Well-Being, Income and Relative Concerns in the UK

We present an empirical model aimed at testing the relative income hypothesis and the effect of deprivation relative to mean
income on subjective well-being. The main concern is to deal with subjective panel data in an ordered response model where
error homoskedasticity is not assumed. A heteroskedastic pooled panel ordered probit model with unobserved individual-specific
effects is applied to micro-data available in the British Household Panel Survey for 1996–2007. In this framework, absolute
income impacts negatively on both completely satisfied and dissatisfied individuals, while relative income affects positively
the most satisfied ones. Such an effect is asymmetric, impacting more severely on the relatively poor in the reference group.
We argue that our results buttress the validity of the relative income hypothesis as an explanation of the happiness paradox.