Abstract
Most often the social comparison or relative income hypothesis has been used as an explanation for the lack of systematic relationship between income and happiness, using the ordered probit regression method. The identification of relevant reference group and the estimation of the differential effects of comparison income have been controversial. To overcome these twin issues, this paper uses an ordinal comparison income approach based on rich/poor dichotomy and rank income. The rank income of an individual is defined as his relative position in the income distribution within the reference group and the average income of the reference group is used to define the rich/poor classification. The differential effects of ordinal incomes across life satisfaction distribution is estimated by the panel fixed effects ordered profit regression model using the WVS data for India. The estimated results show that ordinal income comparison, rather than cardinal average reference income, is a better predictor of life satisfaction levels. Raising income level is relatively important for less satisfied people while increasing rank status is important for highly satisfied people in India.
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