Relative income and the relative deprivation hypothesis

The relative income hypothesis states that individual utility depends both on own income and on income relative to others. The theory of relative deprivation is concerned with the feelings evoked by social inequalities. Both hypotheses are equivalent in terms of their practical verification: individual utility is influenced by relative income, that is, personal income evaluated with respect to the income of others. This chapter reviews both hypotheses, outlines basic aspects of the proposals to measure relative deprivation, and briefly summarizes the relevant results of empirical applications that test these hypotheses.