Empathy and Emulation: Life Satisfaction and the Urban Geography of Comparison Groups

Departures from self-centred, consumption-oriented decision making are increasingly common in economic theory and are well motivated by a wide range of behavioural data from experiments, surveys, and econometric inference. A number of studies have shown large negative externalities in individual subjective well-being due to neighbours' incomes. These reflect the role of nearby households as comparison groups acting in individuals' reference-dependent preferences over income or consumption. At the same time, there are many reasons to expect positive spillovers from having prosperous neighbours. We combine high-resolution geographic data from three Canada-wide social surveys and the 2001 census to disentangle the spatial pattern of reference groups in urban areas and to identify channels of positive and negative spillovers on life satisfaction. We find evidence of significant effects of others' income at different scales and are able to reject a number of alternative explanations for the findings.