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Adaptation and Loss Aversion in the Relationship Between GDP and Subjective Well-Being

Author

Listed:
  • Hovi Matti
  • Laamanen Jani-Petri

    (Faculty of Management and Business, Tampere University, FI-33014 Tampere, Finland)

Abstract

We examine the roles of macro-level adaptation — including social comparison effects becoming more important over time — and macroeconomic loss aversion in the time-series relationship between national income and subjective well-being. Models allowing for these phenomena are applied to cross-country panel data. We find evidence for macroeconomic loss aversion that becomes more important over time: the effects of economic growth become small and statistically insignificant in the long run, whereas the effects of contractions are large and long-lasting. The results are consistent with the Easterlin paradox and point to it being explained by macro-level adaptation to economic growth. Our results highlight the importance of allowing for both dynamics to distinguish long-run from short-run effects and asymmetries to recognize the important effects of contractions. Failing to do the former leads to a misleading impression of the long-run relationship between economic growth and well-being.

Suggested Citation

  • Hovi Matti & Laamanen Jani-Petri, 2021. "Adaptation and Loss Aversion in the Relationship Between GDP and Subjective Well-Being," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 21(3), pages 863-895, July.
    • Handle: RePEc:bpj:bejeap:v:21:y:2021:i:3:p:863-895:n:11
    DOI: 10.1515/bejeap-2020-0204
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    More about this item

    Keywords

    subjective well-being; life satisfaction; adaptation; loss aversion; GDP;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being

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