We test empirically whether people’s life satisfaction depends on their relative
income position in the neighbourhood, drawing on a unique dataset, the German Socio-economic
Panel Study (SOEP) matched with micro-marketing indicators of population characteristics.
Relative deprivation theory suggests that individuals are happier the better their
relative income position in the neighbourhood is. To test this theory we estimate
micro-economic happiness models for the years 1994 and 1999 with controls for own
income and for neighbourhood income at the zip-code level (roughly 9,000 people).
There exist no negative and no statistically significant associations between neighbourhood
income and life satisfaction, which refutes relative deprivation theory. If anything,
we find positive associations between neighbourhood income and happiness in all cross-sectional
models and this is robust to a number of robustness tests, including adding in more
controls for neighbourhood quality, changing the outcome variable, and interacting
neighbourhood income with indicators that proxy the extent to which individuals may
be assumed to interact with their neighbours. We argue that the scale at which we
measure neighbourhood characteristics may be too large still to identify the comparison
effect sought after.