Choosing Your Pond: Location Choices and Relative Income

Nicolas L. Bottan, Ricardo Perez-Truglia

NBER Working Paper No. 23615
Issued in July 2017, Revised in December 2017
NBER Program(s):Public Economics, Political Economy

We provide unique revealed-preference evidence that, when choosing where to live, individuals care about their position in the income distribution. We study the decisions of senior medical students in the National Resident Matching Program (NRMP). They must choose between programs that offer similar nominal incomes, but in cities with different costs of living and income distributions. We conduct a survey experiment with 1,100 NRMP participants to elicit their perceptions about cost of living and relative income in their prospective cities and their rank order submissions. To assess the direction of causality, we embed an information-provision experiment that generates exogenous variations in perceived cost of living and relative income. We find evidence that, in addition to the cost of living, individuals care about their relative income. Moreover, we find substantial and meaningful heterogeneity by relationship status in preferences for relative income. We conduct a complementary survey experiment to assess the robustness of our results and to disentangle confounding factors. The evidence is consistent with a combination of relative concerns and dating expectations.

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Document Object Identifier (DOI): 10.3386/w23615

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