Hedonic Recall Bias. Why You Should Not Ask People How Much They Earn

Hedonic Recall Bias. Why You Should Not Ask People How Much They Earn. Alberto Prati. Journal of Economic Behavior & Organization, https://doi.org/10.1016/j.jebo.2017.09.002

Highlights
•    Survey data lead to large over-estimation of the effect of wage on wage satisfaction
•    Income misreporting in surveys is not random, but endogenous
•    People relatively more satisfied with their wage tend to over-report their wage
•    People relatively less satisfied with their wage tend to under-report their wage

Abstract: The empirical literature which explores the effect of wage on job satisfaction typically uses data drawn from social surveys. In these surveys, the amount of wage is reported by the respondents themselves: thus, the explanatory variable of the econometric models may differ from the true wage people earn. Our paper shows that the use of survey data can lead to considerable over-estimation of the importance of wage as a determinant of wage satisfaction. In particular, responses seem to be affected by a recall bias: people who are satisfied with their wage are more likely to over-report their wage in questionnaires. The more satisfied they are the more they over-report (and vice-versa unsatisfied people). We name this behavioral disposition “hedonic recall bias”.

JEL classification: D03; J28
Keywords: Recall bias; Job satisfaction; Wage satisfaction; Measurement error; Survey income