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On the relation between income inequality and happiness: Do fairness perceptions matter?

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Author Info

  • Christian Bjørnskov

    (Department of Economics, Aarhus School of Business, Aarhus University)

  • Axel Dreher

    (University of Goettingen)

  • Justina A.V. Fischer

    (Stockholm School of Economics)

  • Jan Schnellenbach

    (Ruprecht-Karls-Universität Heidelberg)

Abstract

In this paper, we revisit the association between happiness and inequality. We argue that the perceived fairness of the income generation process affects this association. Building on a two-period model of individual life-time utility maximization, we predict that persons with higher perceived fairness will experience higher levels of life-time utility and are less in favor of income redistribution. In societies with a high level of actual social mobility, income inequality is perceived more positively with increased expected fairness. The opposite is expected for countries with low actual social mobility, due to an increasing relevance of a disappointment effect resulting from unsuccessful individual investments. Using the World Values Survey data and a broad set of fairness measures, we find strong support for the negative (positive) association between fairness perceptions and the demand for more equal incomes (subjective well-being). We also find strong empirical support for the disappointment effect in low social mobility countries. In contrast, the results for high-mobility countries turn out to be ambiguous.

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Bibliographic Info

Paper provided by Courant Research Centre PEG in its series Courant Research Centre: Poverty, Equity and Growth - Discussion Papers with number 20.

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Date of creation: 22 Dec 2009
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Handle: RePEc:got:gotcrc:020

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Keywords: Happiness; life satisfaction; subjective well-being; inequality; income distribution; redistribution; political ideology; justice; fairness; World Values Survey;

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References

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  1. Fischer, Justina AV, 2009. "Subjective Well-Being as Welfare Measure: Concepts and Methodology," MPRA Paper 16619, University Library of Munich, Germany.
  2. Ruut Veenhoven, 2000. "The Four Qualities of Life," Journal of Happiness Studies, Springer, vol. 1(1), pages 1-39, March.
  3. Corneo, Giacomo & Gruner, Hans Peter, 2002. "Individual preferences for political redistribution," Journal of Public Economics, Elsevier, vol. 83(1), pages 83-107, January.
  4. Dohmen, Thomas J. & Falk, Armin & Huffman, David & Marklein, Felix & Sunde, Uwe, 2009. "Biased probability judgment: Evidence of incidence and relationship to economic outcomes from a representative sample," Munich Reprints in Economics 20042, University of Munich, Department of Economics.
  5. La Ferrara, Eliana & Alesina, Alberto, 2005. "Preferences for Redistribution in the Land of Opportunities," Scholarly Articles 4552533, Harvard University Department of Economics.
  6. Kohei Kawamura, 2008. "Inequality, Happiness and Relative Concerns: What Actually is their Relationship?," ESE Discussion Papers 182, Edinburgh School of Economics, University of Edinburgh.
  7. Richard Layard & Guy Mayraz & Stephen Nickell, 2009. "Does relative income matter? Are the critics right?," LSE Research Online Documents on Economics 28594, London School of Economics and Political Science, LSE Library.
  8. Di Tella, Rafael & Alesina, Alberto & MacCulloch, Robert, 2004. "Inequality and Happiness: Are Europeans and Americans Different?," Scholarly Articles 4553007, Harvard University Department of Economics.
  9. Alberto Alesina & Eliana La Ferrara, 2001. "Preferences for Redistribution in the Land of Opportunities," Harvard Institute of Economic Research Working Papers 1936, Harvard - Institute of Economic Research.
  10. Ed Hopkins, 2008. "Inequality, Happiness and Relative Concerns: What Actually is their Relationship?," Levine's Bibliography 122247000000001896, UCLA Department of Economics.
  11. Justina A.V. Fischer, 2009. "Happiness and Age Cycles - Return to Start...?: On the Functional Relationship between Subjective Well-Being and Age," OECD Social, Employment and Migration Working Papers 99, OECD Publishing.
  12. Ada Ferrer-i-Carbonell & Paul Frijters, 2004. "How Important is Methodology for the estimates of the determinants of Happiness?," Economic Journal, Royal Economic Society, vol. 114(497), pages 641-659, 07.
  13. Ravallion, Martin & Lokshin, Michael, 2000. "Who wants to redistribute?: The tunnel effect in 1990s Russia," Journal of Public Economics, Elsevier, vol. 76(1), pages 87-104, April.
  14. Justina A.V. Fischer, 2009. "The Welfare Effects of Social Mobility," OECD Social, Employment and Migration Working Papers 93, OECD Publishing.
  15. Ernst Fehr & Klaus M. Schmidt, 1999. "A Theory Of Fairness, Competition, And Cooperation," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 817-868, August.
  16. Bruno S. Frey & Alois Stutzer, . "Beyond Outcomes: Measuring Procedural Utility," IEW - Working Papers 076, Institute for Empirical Research in Economics - University of Zurich.
  17. Blanchflower, David G. & Oswald, Andrew J., 2004. "Well-being over time in Britain and the USA," Journal of Public Economics, Elsevier, vol. 88(7-8), pages 1359-1386, July.
  18. Christian Bjørnskov & Axel Dreher & Justina Fischer, 2008. "Cross-country determinants of life satisfaction: exploring different determinants across groups in society," Social Choice and Welfare, Springer, vol. 30(1), pages 119-173, January.
  19. Clark, Andrew E. & Frijters, Paul & Shields, Michael A., 2007. "Relative Income, Happiness and Utility: An Explanation for the Easterlin Paradox and Other Puzzles," IZA Discussion Papers 2840, Institute for the Study of Labor (IZA).
  20. Andrew CLARK & Emanuela D'ANGELO, 2010. "Upward Social Mobility, Well-being and;Political Preferences: Evidence from the;BHPS," Working Papers 338, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
  21. Fischer, Justina AV, 2009. "Happiness and age cycles – return to start…," MPRA Paper 15249, University Library of Munich, Germany.
  22. Irena Grosfeld & Claudia Senik, 2009. "The emerging aversion to inequality - Evidence from long subjective data," PSE Working Papers halshs-00586788, HAL.
  23. Hirschman, Albert O., 1973. "The changing tolerance for income inequality in the course of economic development," World Development, Elsevier, vol. 1(12), pages 29-36, December.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Is Sweden too boring?
    by Ben Baumberg in inequalities on 2010-11-17 05:00:54
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Cited by:
  1. Torberg Falch & Justina AV Fischer, 2008. "Public sector decentralization and school performance. International evidence," TWI Research Paper Series 39, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
  2. Fischer, Justina AV & Sousa-Poza, Alfonso, 2010. "The impact of institutions on firms’ rejuvenation policies: Early retirement with severance pay versus simple lay-off. A Cross-European Analysis," MPRA Paper 20343, University Library of Munich, Germany.
  3. Simone Schneider, 2012. "Income Inequality and its Consequences for Life Satisfaction: What Role do Social Cognitions Play?," Social Indicators Research, Springer, vol. 106(3), pages 419-438, May.
  4. Arne Feddersen & Wolfgang Maennig, 2010. "Mega-Events and Sectoral Employment: The Case of the 1996 Olympic Games," Working Papers 035, Chair for Economic Policy, University of Hamburg.
  5. Fischer, Justina AV, 2009. "The Welfare Effects of Social Mobility: An Analysis for OECD countries," MPRA Paper 17070, University Library of Munich, Germany.

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