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

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Author Info

  • Christian Bjornskov

    ()
    (Nationalökonomisk Institut (Department of Economics), Aarhus School of Business, Aarhus Universitet)

  • Axel Dreher

    ()
    (University of Goettingen, Center for European, Governance and Economic Development Research)

  • Justina A.V. Fischer

    ()
    (University of Hamburg, Institute for Public Finance)

  • Jan Schnellenbach

    ()
    (Alfred Weber Institute for Social Policy and Political Economy, 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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File URL: http://www.hced.uni-hamburg.de/WorkingPapers/HCED-027.pdf
File Function: First version, 2009
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Bibliographic Info

Paper provided by Chair for Economic Policy, University of Hamburg in its series Working Papers with number 027.

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Length: 56 pages
Date of creation: 2009
Date of revision:
Publication status: Published in Hamburg Contemporary Economic Discussions, Issue 27, 2009
Handle: RePEc:hce:wpaper:027

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Keywords: 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. Alberto Alesina & Rafael Di Tella & Robert MacCulloch, 2001. "Inequality and Happiness: Are Europeans and Americans Different?," NBER Working Papers 8198, National Bureau of Economic Research, Inc.
  2. Alberto Alesina & Eliana La Ferrara, 2001. "Preferences for Redistribution in the Land of Opportunities," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1936, Harvard - Institute of Economic Research.
  3. Ernst Fehr & Klaus M. Schmidt, 1999. "A Theory Of Fairness, Competition, And Cooperation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(3), pages 817-868, August.
  4. Ed Hopkins, 2008. "Inequality, happiness and relative concerns: What actually is their relationship?," Journal of Economic Inequality, Springer, Springer, vol. 6(4), pages 351-372, December.
  5. Andrew E. Clark & Emanuela D'Angelo, 2013. "Upward Social Mobility, Well-being and Political Preferences: Evidence from the BHPS," CEP Discussion Papers, Centre for Economic Performance, LSE dp1252, Centre for Economic Performance, LSE.
  6. Richard Layard & Guy Mayraz & Stephen Nickell, 2009. "Does Relative Income Matter?: Are the Critics Right?," SOEPpapers on Multidisciplinary Panel Data Research, DIW Berlin, The German Socio-Economic Panel (SOEP) 210, DIW Berlin, The German Socio-Economic Panel (SOEP).
  7. Christian Bjørnskov & Axel Dreher & Justina A. V. Fischer, 2006. "Cross-country determinants of life satisfaction: exploring different determinants across groups in society," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 19290, London School of Economics and Political Science, LSE Library.
  8. Irena Grosfeld & Claudia Senik, 2009. "The emerging aversion to inequality - Evidence from long subjective data," PSE Working Papers, HAL halshs-00586788, HAL.
  9. La Ferrara, Eliana & Alesina, Alberto, 2005. "Preferences for Redistribution in the Land of Opportunities," Scholarly Articles 4552533, Harvard University Department of Economics.
  10. Ruut Veenhoven, 2000. "The Four Qualities of Life," Journal of Happiness Studies, Springer, Springer, vol. 1(1), pages 1-39, March.
  11. Hirschman, Albert O., 1973. "The changing tolerance for income inequality in the course of economic development," World Development, Elsevier, Elsevier, vol. 1(12), pages 29-36, December.
  12. Hopkins, Ed, 2008. "Inequality, Happiness and Relative Concerns: What Actually is their Relationship?," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2008-01, Scottish Institute for Research in Economics (SIRE).
  13. Blanchflower, David G. & Oswald, Andrew J., 2001. "Well-Being Over Time in Britain and the USA," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 616, University of Warwick, Department of Economics.
  14. Bruno S. Frey & Alois Stutzer, 2005. "Beyond outcomes: measuring procedural utility," Oxford Economic Papers, Oxford University Press, vol. 57(1), pages 90-111, January.
  15. Corneo, Giacomo & Grüner, Hans Peter, 2001. "Individual Preferences for Political Redistribution," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2694, C.E.P.R. Discussion Papers.
  16. Ravallion, Martin & Lokshin, Michael, 2000. "Who wants to redistribute?: The tunnel effect in 1990s Russia," Journal of Public Economics, Elsevier, Elsevier, vol. 76(1), pages 87-104, April.
  17. 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).
  18. Justina A.V. Fischer, 2009. "The Welfare Effects of Social Mobility," OECD Social, Employment and Migration Working Papers, OECD Publishing 93, OECD Publishing.
  19. Dohmen, Thomas & Falk, Armin & Huffman, David & Marklein, Felix & Sunde, Uwe, 2009. "Biased probability judgment: Evidence of incidence and relationship to economic outcomes from a representative sample," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 72(3), pages 903-915, December.
  20. Kohei Kawamura, 2008. "Inequality, Happiness and Relative Concerns: What Actually is their Relationship?," ESE Discussion Papers, Edinburgh School of Economics, University of Edinburgh 182, Edinburgh School of Economics, University of Edinburgh.
  21. Ada Ferrer-i-Carbonell & Paul Frijters, 2002. "How important is Methodology for the Estimates of the Determinants of Happiness?," Tinbergen Institute Discussion Papers, Tinbergen Institute 02-024/3, Tinbergen Institute.
  22. Fischer, Justina AV, 2009. "Subjective Well-Being as Welfare Measure: Concepts and Methodology," MPRA Paper 16619, University Library of Munich, Germany.
  23. 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, OECD Publishing 99, OECD Publishing.
  24. Fischer, Justina AV, 2009. "Happiness and age cycles – return to start…," MPRA Paper 15249, University Library of Munich, Germany.
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Citations

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. Simone Schneider, 2012. "Income Inequality and its Consequences for Life Satisfaction: What Role do Social Cognitions Play?," Social Indicators Research, Springer, Springer, vol. 106(3), pages 419-438, May.
  2. Arne Feddersen & Wolfgang Maennig, 2010. "Mega-Events and Sectoral Employment: The Case of the 1996 Olympic Games," Working Papers, Chair for Economic Policy, University of Hamburg 035, Chair for Economic Policy, University of Hamburg.
  3. Torberg Falch & Justina AV Fischer, 2008. "Public sector decentralization and school performance. International evidence," TWI Research Paper Series, Thurgauer Wirtschaftsinstitut, Universität Konstanz 39, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
  4. Fischer, Justina AV, 2009. "The Welfare Effects of Social Mobility: An Analysis for OECD countries," MPRA Paper 17070, University Library of Munich, Germany.
  5. 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.

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