The aspirational income hypothesis: On the limits of the relative income hypothesis.

• When the decision maker (DM) chooses a group of low income, the relative income hypothesis supposes only positive utility outcome. • The paper argues that the DM experiences also a countervailing negative utility, called the "aspirational income effect". • The countervailing effect is the result of aspiration, the desire to be associated with a high income group. • The paper runs an experiment that confirms the aspirational income effect, which cannot be explained by expected income. • The experiment shows that the aspirational income effect is much stronger than the much-touted relative income effect. According to the "relative income hypothesis," decision makers derive positive utility from identifying with a group that performs more poorly than they do. We hypothesize that decision makers simultaneously derive negative utility from identifying with such a group. The reason is that decision makers aspire toward status, and thus prefer to identify with a group that is more successful than they are. We call such proposed reason the "aspirational income hypothesis." If the aspirational income effect dominates the relative income effect, decision makers would prefer to join groups with higher rank than their own. We report data from an experiment that supports the aspirational income hypothesis. It shows that the hypothesis holds (at a weaker intensity) even when it is costly to join a higher ranking group. [ABSTRACT FROM AUTHOR]