this phenomenon to occur: if individuals use the concept of permanent income both to interpret the steps of Cantril’s ladder and to answer the question about their position in it, then the distribution of answers should be uniform as the difference in variance is irrelevant.

While the first condition has found some empirical support (Hall and Mishkin, 1982), the second condition requires that individuals use two different definitions of income, one to interpret the question and another to answer it. It is beyond the scope of this paper to test for this kind of behavioral patterns but, to the best of our knowledge, this specific type of “cognitive dissonance” has not been reported in literature. We therefore conclude that, even if individuals were responding based on their permanent income rather than on their current income, the “bunching in the middle” should not be a feature of the data.

**Misperceptions: reference group versus overall population** Individuals may estimate their position in the income distribution by extrapolating to the whole population their position in the income distribution of a reference group. Cruces et al. (2013) show that, under certain distributional assumptions, this behavior could give rise to a “bunching in the middle”. In particular, in the presence of first-order stochastic dominance of high income reference groups’ income distributions over that of the whole population (and a symmetric dominance of low income reference groups’ income distributions), individuals in high income reference groups will underestimate their true position and individuals in low income reference groups will overestimate their true position. Reference groups can be of different kinds, but the literature has established that geographical reference groups are the most relevant when comparing welfare (Clark et al., 2008, 2009; Clark and Senik, 2010).

Table 2 presents a test of this mechanism using LiTS data. LiTS surveys, being only representative at the country level, don’t provide sufficient sample size for an accurate estimation of respondents’ position in the income distribution of their locality, which is the reference group used in Cruces et al.’s analysis. Given the information available in LiTS we propose two alternative reference groups: (1) individuals with the same educational level (defined as either university education or less than university education) living in the same region within a country; (2) individuals with the same age (for which there are three age groups - below 35 years, between 35 and 55, and over 55 years of age) and same educational level within a country. Whenever the respondent’s region is not available, the country as a whole is used. A simple linear regression of the perceived decile as dependent variable, and the objective decile and the rank within the reference group as independent variables is estimated by OLS. The results of table 2 show that, conditional on the inclusion of the objective consumption decile and a series of individual level controls, the respondent’s rank within either type of reference group is not correlated positively with the perceived position in the income distribution - if anything, in 12