Reference Income Research Articles

Ambition and Jealousy: Income Interactions in the 'Old' Europe Versus the 'New' Europe and the United States

Using individual-level data from a large number of countries, this paper examines how self-reported subjective well-being depends on own income and reference income, where reference income is defined as the income of professional peers. It uncovers a divide between -low mobility- European countries versus European post-Transition countries and the United States. Whereas in the old Europe, the income of my reference group exerts a negative effect on my individual welfare, it has a positive impact in the new Europe and the United States. This finding is interpreted as reflecting the relative importance of comparisons (jealousy) versus information (ambition), which in turn depends on the degree of mobility and uncertainty in the economy.

Hydropower scheduling and financial risk management

AbstractThis paper describes a risk management tool for hydropower generators and its application to Norway's second‐largest generation company and largest electricity consumer, Norsk Hydro ASA. The tool considers both operations scheduling and the utilization of financial contracts for risk management. Financial risks are accounted for by penalizing incomes below a reference income. The risk management problem is solved by a combination of stochastic dual dynamic programming and stochastic dynamic programming. Simulations demonstrate that lower income scenarios improve when risk aversion is introduced. Copyright © 2005 John Wiley & Sons, Ltd.

Income Mobility Comparisons and Equivalizing Transformations

The existing literature on income mobility comparisons is strongly characterized by contrasting results and empirical puzzles. In this paper we focus on the role of the equivalizing transformation for the definition of complete mobility orderings. Two crucial considerations are involved. First, we suggest that a separating line should be drawn between measuring intra-generational income mobility and measuring socially relevant effects of intra-generational income mobility. Secondly, we observe that some of the normative issues entailed in the definition of efficient mobility indices should be opportunely revisited once the equivalizing transformation has been implemented, not before. In this scenario, the use of equivalent adults seems to be the more normatively efficient solution whenever income mobility orderings are investigated over heterogeneous societies. In particular, this result seems to be supported by the empirical investigation over eight countries and five waves (ECHP – PSID), that is, most of detected empirical puzzles in the existing literature disappear when the reference income unit consists of the equivalent adult.

Learning to Reoptimize Consumption at New Income Levels: A Rationale for Prospect Theory

This paper provides a theoretical rationale for three experimental results of Prospect Theory: risk preferences are over gains and losses, loss aversion, and diminishing sensitivity. We consider a (boundedly rational) decision maker who does not find her new optimal consumption bundle with certainty when she is faced with a new income level. This alters her indirect utility function and makes her more risk averse at her current reference income level and less risk averse for a range of incomes below her reference income level.

Reference Incomes, Loss Aversion, and Physician Behavior

We examine the effects of reference income on the behavior of young male physicians. Using a unique panel of data, we relate physicians' reference and actual incomes to their subsequent income growth. Reference income has a strong positive effect on subsequent income for physicians who are below their reference points, but not for physicians who are at or above their reference points. Loss aversion, which posits a kink in utility at the reference point, explains this puzzling pattern. Physicians respond strongly to shortfalls from the reference point—they take unappealing actions to boost earnings—because the marginal utility of income is steep in that range. Competing prominent theories, tested here, fail to explain these relationships.

Prospect Theory and Risk Preferences of Oregon Seed Producers

AbstractProspect theory relates risk preference classifications to gains and losses from a reference income level. This study applies prospect theory to reinterpret historical studies of risk preferences of Oregon grass seed growers. A significant relationship between changes in classifications of preferences and changes in income was found. Results indicated that those who lost income were concentrated in the category of changing to risk preferrers. Income changes calculated from crop combinations were also found to be correlated in a theoretically correct pattern with positive measures of risk from crop enterprises. The research therefore is consistent with further applications of prospect theory to farm management.

On Calculating Cost-of-Living Index Numbers for Arbitrary Income Levels

We present a method for calculating cost-of-living index numbers for arbitrary base period income levels without using heavy econometric estimation methods. The second order approximation formulas contain parameters which can easily be estimated by a differential demand system. Using a suitable specification, it is possible to work at a low level of commodity aggregation. The method is demonstrated on Netherlands data for the period 1952-1981. COST-OF-LIVING INDEX NUMBERS for individual households can be expected to differ substantially. There are various reasons for this expectation. Prices paid for the same commodity can vary between households. In principle each household has its own preference structure implying its own substitution behavior in the presence of changing prices. Income differences between households imply dif- ferences in consumption patterns which, in the presence of changing relative prices, imply diverging cost-of-living index numbers. Especially the variation of cost-of-living index numbers with the reference income levels attracts a lot of attention in the public discussion. There is some empirical evidence about the magnitude of this variation, because most statistical offices publish more than one consumer price index. The Netherlands CBS for instance has three CPI's, namely for all households, for households of wage earners with an income below a certain limit, and for households of wage earners above that limit. More detailed are the results of Michael (1979), Hagemann (1982), and Balk (1984). Using consumption patterns of individual households, obtained from a consumer expenditure survey, they compiled price index numbers for individual households and studied the differ- ences under various viewpoints. The drawback of these studies is that they are based on Laspeyres type price index numbers. Thus what in essence is compared are upper limits of household-specific cost-of-living index numbers. The substitu- tion behavior is ignored. This is acceptable only for relatively short periods or, more generally, for periods with relatively small price changes. useful feature of working with Laspeyres type index numbers is that one can use highly 1 The views expressed in this paper are those of the author and do not necessarily reflect the policies of the Netherlands Central Bureau of Statistics. The author gratefully acknowledges the computational assistance of H. A. van der Grient and A. J. Hundepool. Mike Baye is thanked for his comments on a previous version. previous version entitled A simple method for calculating

The Role of Patient Time in the Pricing of Dental Services: The Fee-Provider Density Relation Explained

The literature on the economics of medical care has emphasized certain features of medical markets which appear to set them apart from the conventional supply/ demand framework of the theory of competitive markets. Ignorance of medicine and the efficacy of various treatments leave buyers of medical and/ or dental services dependent upon the physician, dentist or other health care provider for information pertinent to the choice of treatment or procedure. Thus, the traditional separation of the consumer's and supplier's decision making processes is broken down, and the is in a position to directly influence demand or may even be considered the decision maker.' Proponents of the supplier induced demand argue that physicians inflate demand whenever the supply of medical manpower is expanded. This interpretation has gained attention because it appears to offer an explanation for the observed cross-sectional positive relation between fees and the density of health care providers.2 It is well known, however, that the demand creation model, which assumes a zero or constant marginal cost (below marginal revenue) of demand creation, is not closed-either fees or demand is unbounded. One solution to this problem is to assume a target or reference income as a limit on demand creation (Feldstein [12], Fuchs-Kramer [13], Evans, et al. [9]). With such a limit, the demand creation/ satisficing model can be closed and