We develop a theoretical framework that considers four distinct explanatory channels through which neighbors’ income could affect utility: public goods, cost of living, expectations of future income, and the direct effect (relative income hypothesis (RIH) and altruism). The relationship is theoretically ambiguous. We then empirically estimate the relationship with subjective well-being (SWB) data from the U.S. Gallup-Healthways Well-Being Index and geographically-based median-income data from the American Community Survey for both ZIP codes and MSAs. We find that the sign is proximity-dependent: the relationship is positive (negative) when using ZIP-code (MSA) median income as the reference income. This suggests that positive channels dominate locally while negative channels dominate regionally. These findings are consistent across multiple SWB measures and a wide range of health-related indices, for a variety of specification checks, and for most subgroups. Conditioning on explanatory-channel proxies, we find that the relationship between SWB and neighbors’ income is either nullified or rendered positive, suggesting that the RIH is either inoperant or offset by altruism. Of the other channels, the public-goods channel is operant at the ZIP-code- and MSA-levels, and the cost-of-living channel is operant at the MSA-level.
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