# **1. Introduction**

There is now ample support for the view that people are concerned about their relative incomes. Sociology and social psychology have long emphasized the relevance to defining poverty of concerns about shame, stigma and social exclusion.<sup>1</sup> Such “social effects” on welfare have also received attention in economics, including Duesenberry’s (1949) model of how relative consumption influences savings, the arguments of Hirsch (1977) and Frank (1985) on how the evaluation of certain consumption goods depends on consumption relative to others, and the arguments and evidence that work effort is influenced by relative wages (Cohn, et al., 2014). The idea that welfare depends on relative income has also found support in survey data on subjective self-assessments of welfare, as in (for example) Luttmer (2005) and Knight et al. (2009).<sup>2</sup> And the idea has been invoked to explain the “Easterlin paradox” whereby average happiness appears not to rise much with economic growth (Easterlin, 1974; Clark et al., 2008). Economic theory has also provided a rationale for why relative income matters; for example, Rayo and Becker (2007) show that the welfare relevance of relative position can emerge as a response to the constraints faced in making choices (notably the difficulty in distinguishing close options and the boundedness of happiness). Furthermore, the literature suggests that poor people also care about relative incomes.<sup>3</sup> In this light, how should we measure global poverty? An appealing guiding principle requires that poverty lines should be welfare-consistent, meaning that they are money metrics of some reasonable concept of welfare. As Sen (1983, p.168) puts it “...an absolute approach in the space of capabilities translates into a relative approach in the space of commodities.”<sup>4</sup> Whether the absolute standard is an index of “utility” or an index of “capabilities” may be important for implementation, but the first-order issue is to demand welfare consistency in some defensible sense when measuring global poverty, i.e., those we judge to be equally well off are all either

> 1  Important early contributions were made by Davis (1959) and Runciman (1966). In the context of understanding poverty, see (inter alia) Abel-Smith and Townsend (1966), Townsend (1979) and Walker (2014).

> 2  Surveys of this literature can be found in Frey and Stutzer (2002), Senik (2005) and Clark et al. (2008). 3  Anthropologists have long described behaviors consistent with this idea; see, for example, Geertz (1976) and Fuller (1992). Rao (2001) describes the importance of celebrations to social networks among poor people in rural India. Banerjee and Duflo (2008) document expenditures on celebrations and festivals by very poor people in surveys for a number of countries. Ravallion and Lokshin (2010) find that the poorest within a (very) poor country (Malawi) put low weight on relative position but this matters more to better-off strata. There is also evidence of adverse effects of relative position on health behaviors (Balsa et al., 2014). Smith et al. (2012) provide a review of many studies showing behavioral responses to relative deprivation.

> 4  Sen was commenting on the sociological approach to measuring poverty in Britain taken by Townsend (1979).

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