One of the essential concepts in sociology is that of the reference group. Loosely speaking, the basic idea is that our norms and our behavior are strongly influenced by what other people think and do. Some individuals will have more influence on us than others. The group of individuals who have a lot of influence on us we call our social reference group.
It is clear that the concept is of the utmost importance to understanding the formation of norms and the interaction of people in society. In practice, however, it is very difficult to give operational meaning to the concept. In fact, we believe that the theory and even more the operationalization of the theory is in its infancy. In this chapter we try to add a few building blocks without any pretence at having brought our knowledge very much farther.
Although the concept of the reference group originates in sociology it is now also increasingly considered and studied in economics. We mention, for example, Clark and Oswald (1996), Duesenberry (1949), Frank (1985), Veblen (1909), and Easterlin (1974 , 1995). We abstain from giving a complete survey of the abundant literature.
In this chapter we will restrict ourselves to the effect on norms, and neglect actual behavior, although we might say that the acceptance of a norm as such is a mode of behavior.
Ferrer-i-Carbonell (2003) considers reference effects in the German GSOEP data set, where she studies the general-satisfaction question. She explains GS by an ordered-probit specification and she adds an extra explanatory variable. She starts to define the reference groups for each individual in the sample. A distinction is made between fifty subgroups on the basis of a division into five education categories, five age brackets, and two regions (West and East). For each subgroup the average log-incomeis defined. Notice that the