Both the welfarist and non-welfarist arguments can claim some support from past thinking and evidence. The idea that people care about relative income has a long history. It is sometimes called the theory of relative deprivation (RD), following Runciman (1966), although economists often refer to it as the “relative income hypothesis,” following Duesenberry (1949). Some version of RD has often been invoked to explain observed behavior.<sup>11</sup> While early discussions lacked evidence on the existence of RD effects, there is now a body of supportive evidence from both observational studies and experiments, though mainly in developed-country settings. Experiments have suggested that relative position matters to behavior.<sup>12</sup> Regressions for self-reported “satisfaction with life” or perceived economic welfare have also found results broadly consistent with the idea of RD.<sup>13</sup> There has been much less research on whether very poor people care about RD; in one of the few studies, Ravallion and Lokshin (2007) found evidence for Malawi that, for very poor people, the positive externalities from having better-off friends and neighbors outweighed the negative externalities through RD, although this pattern reversed at higher income levels.

The idea that certain socially-specific expenditures can be deemed essential for social inclusion is also long-standing. Famously, Adam Smith (1776, Book 5, Chapter 2, Article 4) pointed to the social-inclusion role of a linen shirt in eighteenth century Europe: “A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall into without extreme bad conduct.” The social roles of certain forms of consumption have also been noted from research in poor countries. Anthropologists have pointed to the social roles played by festivals, celebrations and communal feasts; see, for example, Geertz (1976) and Fuller (1999, Chapter 6). Rao (2002) documents the importance of celebrations to maintaining the social networks that are crucial to coping with poverty in rural India. Banerjee and Duflo (2007) report seemingly high expenditures on celebrations and festivals by very poor people in survey data for a number of

> 11 Easterlin (1974) used RD to explain why economic growth in the US has had little effect on the proportion of people who think they are happy. Other examples of the use of relativism to explain behavior can be found in Frank (1997), Oswald (1997), Fehr and Schmidt (1999), Walker and Smith (2001) and Hopkins (2008).

> 12 See, for example, Fehr and Schmidt (1999) and Alpizar et al (2005).

> 13 Examples include van de Stadt et al., (1985), Clark and Oswald (1996), Solnick and Hemenway (1998), Pradhan and Ravallion (2000), Ravallion and Lokshin (2002, 2007), McBride (2001), Blanchflower and Oswald (2004), Kingdon and Knight (2007), Ferrer-i-Carbonell (2005), Luttmer (2005) and Fafchamps and Shilpi (2009).

4