Working Paper No. 2010/76 Subjective Poverty and Reference- Dependence Income over Time, Aspirations and Reference Groups

How a person assesses the wellbeing derived from income is often determined as much by its contrast with a reference point as by the level of income itself. In this paper, I use a household survey from Mexico to examine how subjective poverty assessments not only depend on the absolute level of income, but on how it compares to three reference points: the income of a reference group, the level of income that the individual aspired to have accomplished by the current stage of her life, and the income she had three years ago. I find that subjective poverty assessments evidence reference-dependence in the income domain relative to reference groups and aspirations, but not with respect to previous levels of income. Further, the results indicate that ‘keeping up with the Joneses ” behaviour is a feature only of the upper-middle class, and that the inability to exceed income aspirations increases the probability of subjective poverty regardless of the individual’s position in the income distribution