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Abstract

How does subjective well-being depend on the fate of others when a covariate shock strikes? We address this question by providing novel evidence on the impact of shock-induced damages experienced by individuals and their reference group on life satisfaction. We do so by examining the case of pastoralists in Mongolia, who faced a once-in-50-years winter disaster. Our identification strategy exploits the quasi-experimental nature of the extreme event. The empirical analysis builds on a detailed household panel survey, complemented with aggregated climate data and historic livestock census data. Results show that exposure to the extreme event significantly and strongly reduces subjective well-being even 4–5 years after the event occurred. The negative shock impact is amplified by observing peers doing economically worse. Similarly, exposure to the extreme event increases the perceived inequality among households with assets at risk. We argue that the event increased sectoral disparities between pastoralists and those households not engaged in agriculture.