Stick and Stay, Make it Pay? Time Preferences and Marginal (Dis)Utility of Relative Concerns

Abstract

Individuals' preferences for immediate gratification versus their ability to postpone it, i.e., time preferences, might be related to their marginal utility or disutility stemming from an increase in the income of comparable others, i.e., relative concerns. We argue that while an increase in others' income might lead to a higher level of marginal disutility for those seeking immediate gratification, the disutility among patient individuals might be lower if they prioritise the future development of their income and consider catching up with others' income over the long run. To investigate whether time preferences might moderate marginal utility due to increased others' income, we use a subjective measure of individual patience and a life satisfaction measure observed over a long period of time (Socio-Economic Panel, SOEP). Using panel data fixed effects interaction models, we find highly consistent evidence that the well-documented disutility from relative income, the so-called status effect in the literature, is predominantly experienced by impatient individuals with higher discount rates. In contrast, patient individuals with lower discount rates, high self-control, and the ability to regulate their stress and anxiety levels experience lower disutility or even gain utility due to their relative income, the so-called information effect, which is significantly different from that of impatient individuals. The results are robust across a variety of checks, including income types, savings, reference groups, and time preference measures obtained from incentivised time preference experiments. We discuss the implications of these results for behavioural and welfare economics.