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A Reassessment of the Relationship Between GDP and Life Satisfaction

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  • Proto, Eugenio

    (University of Warwick)

  • Rustichini

    (University of Minnesota)

Abstract

Determining the relation between life satisfaction and aggregate income at country level has been problematic, because cross-country and times-series analysis generally give different conclusions. Here we analyze this relation without imposing any polynomial structure to the estimated model and eliminating potentially confounding country-specific factors. We show the existence of a bliss point in the interval between 26,000$ and 30,000$ (2005 in PPP) in relationship between individual life satisfaction and GDP. An almost identical result is found when the relationship between aggregate income of Western European regions and life satisfaction of their residents is analyzed: in this case, data suggest a bliss point between 30,000$ and 33,000$. In both samples, we nd rst evidence of a decreasing level of life satisfaction after the bliss points. Therefore, the analysis overall shows the existence of a hump-shaped pattern between GDP and life satisfaction. We discuss possible explanations of the hump shaped pattern linked to external effects of the aggregate income on life satisfaction due, for example, to habit formation and income comparison and present an econometric test of this potential explanation based on some recent findings of the ve-factor personality theory.

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Bibliographic Info

Paper provided by Competitive Advantage in the Global Economy (CAGE) in its series CAGE Online Working Paper Series with number 94.

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Date of creation: 2012
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Handle: RePEc:cge:wacage:94

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Keywords: Life Satisfaction; GDP; Income; Personality;

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  1. Clark, Andrew E. & Etilé, Fabrice & Postel-Vinay, Fabien & Senik, Claudia & Van der Straeten, Karine, 2004. "Heterogeneity in Reported Well-Being: Evidence from Twelve European Countries," IZA Discussion Papers 1339, Institute for the Study of Labor (IZA).
  2. Richard Layard & Guy Mayraz & Stephen J. Nickell, 2007. "The Marginal Utility of Income," SOEPpapers on Multidisciplinary Panel Data Research 50, DIW Berlin, The German Socio-Economic Panel (SOEP).
  3. Stevenson, Betsey & Wolfers, Justin, 2008. "Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox," CEPR Discussion Papers 6944, C.E.P.R. Discussion Papers.
  4. repec:pri:cheawb:deaton_income_health_and_wellbeing_around_the_world_evidence_%20from_gallup_world_poll_jep_spring2008 is not listed on IDEAS
  5. Easterlin, Richard A., 1995. "Will raising the incomes of all increase the happiness of all?," Journal of Economic Behavior & Organization, Elsevier, vol. 27(1), pages 35-47, June.
  6. Andrew E. Clark and Andrew J. Oswald, . "Satisfaction and Comparison Income," Economics Discussion Papers 419, University of Essex, Department of Economics.
  7. Easterlin, Richard A., 2005. "A puzzle for adaptive theory," Journal of Economic Behavior & Organization, Elsevier, vol. 56(4), pages 513-521, April.
  8. Oswald, Andrew J. & Wu, Stephen, 2010. "Objective Confirmation of Subjective Measures of Human Well-being: Evidence from the USA," IZA Discussion Papers 4695, Institute for the Study of Labor (IZA).
  9. Erzo F.P. Luttmer, 2004. "Neighbors as Negatives: Relative Earnings and Well-Being," NBER Working Papers 10667, National Bureau of Economic Research, Inc.
  10. repec:pri:cheawb:deaton_income_health_and_wellbeing_around_the_world_evidence_%20from_gall is not listed on IDEAS
  11. David G. Blanchflower & Andrew J. Oswald, 2000. "Well-Being Over Time in Britain and the USA," NBER Working Papers 7487, National Bureau of Economic Research, Inc.
  12. Stutzer, Alois, 2004. "The role of income aspirations in individual happiness," Journal of Economic Behavior & Organization, Elsevier, vol. 54(1), pages 89-109, May.
  13. Andrew Caplin & Mark Dean, 2008. "Dopamine, Reward Prediction Error, and Economics," The Quarterly Journal of Economics, MIT Press, vol. 123(2), pages 663-701, 05.
  14. Angelini, V.; & Cavapozzi, D.; & Corazzini L.; & Paccagnell O.;, 2011. "Do Danes and Italians Rate Life Satisfaction in the Same Way? Using Vignettes to Correct for Individual-Specific Scale Biases," Health, Econometrics and Data Group (HEDG) Working Papers 11/20, HEDG, c/o Department of Economics, University of York.
  15. Angus Deaton, 2008. "Income, Health, and Well-Being around the World: Evidence from the Gallup World Poll," Journal of Economic Perspectives, American Economic Association, vol. 22(2), pages 53-72, Spring.
  16. Richard Easterlin, 2005. "Feeding the Illusion of Growth and Happiness: A Reply to Hagerty and Veenhoven," Social Indicators Research, Springer, vol. 74(3), pages 429-443, December.
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