Relative Income, Happiness and Utility: An Explanation for the Easterlin Paradox and Other Puzzles
AbstractThe well-known Easterlin paradox points out that average happiness has remained constant over time despite sharp rises in GNP per head. At the same time, a micro literature has typically found positive correlations between individual income and individual measures of subjective well-being. This paper suggests that these two findings are consistent with the presence of relative income terms in the utility function. Income may be evaluated relative to others (social comparison) or to oneself in the past (habituation). We review the evidence on relative income from the subjective well-being literature. We also discuss the relation (or not) between happiness and utility and discuss some non-happiness research (behavioural, experimental, neurological) dealing with income comparisons. We last consider how relative income in the utility function affects economic models of behaviour in a number of different domains.
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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2840.
Length: 68 pages
Date of creation: Jun 2007
Date of revision:
Publication status: published in: Journal of Economic Literature, 2008, 46 (1), 95-144
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Other versions of this item:
- Andrew E. Clark & Paul Frijters & Michael A. Shields, 2008. "Relative Income, Happiness, and Utility: An Explanation for the Easterlin Paradox and Other Puzzles," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 46(1), pages 95-144, March.
- D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
- D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
- H00 - Public Economics - - General - - - General
- I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
- J28 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Safety; Job Satisfaction; Related Public Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-07-07 (All new papers)
- NEP-CBE-2007-07-07 (Cognitive & Behavioural Economics)
- NEP-HAP-2007-07-07 (Economics of Happiness)
- NEP-LTV-2007-07-07 (Unemployment, Inequality & Poverty)
- NEP-NEU-2007-07-07 (Neuroeconomics)
- NEP-SOC-2007-07-07 (Social Norms & Social Capital)
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