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$54,000 a Year: It Feels Like More If Your Neighbors Make Less

Ricardo Perez-Truglia’s research uses relocation choices of medical residents to study feelings about relative income

Imagine your employer gave you the opportunity to move to a new city. All else being equal — let's say the cities offer similar cost of living and amenities — would you rather live someplace where your income makes you relatively rich or relatively poor?

To map these preferences in a high-stakes, real-life setting, Nicolas L. Bottan of the University of Illinois at Urbana-Champaign and UCLA Anderson's Ricardo Perez-Truglia studied the decisions of medical students applying to residency programs. In a working paper, the authors offer evidence that relative income matters, and that the distinction matters differently for different people.

Bottan and Perez-Truglia studied a unique audience: 1,080 medical students participating in the 2017 National Resident Matching Program (NRMP), which requires graduating med students to submit a ranked list of their preferred residency programs. While these programs offer similar salaries — $54,000 on average in the first year — they're located in cities all over the country, big and small, with widely varying costs of living and with populations that have widely varying incomes. That creates an ideal setting for comparing how people view absolute versus relative income.

This year's NRMP was the largest ever, with 35,969 applicants from U.S. and international medical schools. The 1,080 students in the study represent about 5 percent of the students coming from U.S. schools. Of the 1,080 respondents, 382 were single and 698 were part of a couple. There were about an equal number of women and men.

Students in the study hailed from 27 of the 135 accredited medical schools in the United States, and those 27 schools are located in 22 geographically diverse states. Researchers used U.S. News & World Report rankings to compare school characteristics and determine that their sample was representative of the overall medical school universe.

The authors elicited the top two programs that the candidate was considering submitting to the residency match. After that, the authors provided to the applicants statistics about the cost of living and relative income in each of these two cities.

In providing the statistics, the authors conducted an experiment. They exploited the fact that there are multiple reputable sources for each of these statistics. Then they flipped a coin to decide which source they show to each individual.

The authors asked the medical students which of the two programs they would rank higher, right after providing them with the statistics, and they also asked a month later, following the submission deadline. Using the source-randomization experiment, they estimated how much these applicants care about the cost of living and relative income when deciding which program to rank higher.

The results suggest that the average medical student wants to live in areas with lower cost of living and with higher relative income. That is, they care about their absolute standard of living as well as about their relative ranking. Moreover, the authors found a significant difference by relationship status: Individuals in a relationship would rather be big fish in small ponds, while single individuals would rather be small fish in big ponds.

One potential explanation for those who prefer to be big fish in small ponds is that they expect to be treated better by their peers. Or maybe some people just get a boost from being richer than everyone else.

And what of the finding that single people generally prefer to live among people richer than themselves? Bottan and Perez-Truglia's favorite explanation for that is pretty simple: A richer pond equals a richer dating pool. These medical students expect to earn over $200,000 per year after they finish the residency. If they are single and want to meet a partner who can match that income level during their residency, they'd better move to a rich city.

Bottan, N.L., & Perez-Truglia, R. (2017). Choosing your pond: Measuring preferences for relative consumption. [Abstract]

Ricardo Perez-Truglia

Assistant Professor of Economics

Ricardo Perez-Truglia’s research interests include behavioral economics, political economy and public economics. He studies how social interactions and information frictions shape economic and political decisions and intends his research to inform policymakers in the developed and developing world, leading to practical applications.

 

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