Quantifying welfare costs of peer influence and income misperception: a revealed preference approach

Sam Cosaert - University of Antwerp

We analyze peer effects in consumption and their impact on individual welfare using detailed data on Dutch households’ consumption and labor supply. Our unique dataset includes perceived peer incomes, allowing us to assess the welfare effects of income misperceptions. Using a nonparametric revealed preference approach, we quantify these effects in money metric terms. The methodology’s robustness to functional specification errors ensures reliable insights into how peer influence and misperceptions shape individual welfare. Our results indicate that the welfare cost of peer effects averages between 115 EUR and 222 EUR per month per individual. Additionally, we find that peer and welfare effects vary by age, education, earnings, and household composition, with notable gender differences.