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Relative Income, Happiness and Utility: An Explanation for the Easterlin Paradox and Other Puzzles

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Author Info
Andrew E. Clark () (Paris School of Economics and IZA)
Paul Frijters () (Queensland University of Technology)
Michael Shields () (University of Melbourne and IZA)

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Abstract

The 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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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2840.

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Length: 68 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:iza:izadps:dp2840

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Related research
Keywords: income happiness utility comparison habituation

Other versions of this item:

Find related papers by JEL classification:
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 and Poverty - - - General Welfare
J28 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Safety; Job Satisfaction; Related Public Policy

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  1. Frijters, Paul & Johnston, David W. & Shields, Michael A., 2008. "Happiness Dynamics with Quarterly Life Event Data," IZA Discussion Papers 3604, Institute for the Study of Labor (IZA). [Downloadable!]
  2. Barnett, Richard C & Bhattacharya, Joydeep & Bunzel, Helle, 2008. "Are the Joneses making you financially vulnerable?," Staff General Research Papers 12909, Iowa State University, Department of Economics. [Downloadable!]
  3. Lelkes, Orsolya, 2008. "Happiness over the life cycle: exploring age-specific preferences," MPRA Paper 7302, University Library of Munich, Germany. [Downloadable!]
  4. Fischer, Justina AV, 2008. "Competition and well-being: does market competition make people unhappy?," Working Paper Series in Economics and Finance 697, Stockholm School of Economics. [Downloadable!]
  5. Arie Kapteyn & James P. Smith & Arthur van Soest, 2008. "Are Americans Really Less Happy With Their Incomes?," Working Papers 591, RAND Corporation Publications Department. [Downloadable!]
  6. Andrew E. Clark, 2007. "Born To Be Mild? Cohort Effects Don’t (Fully) Explain Why Well-Being Is U-Shaped in Age," IZA Discussion Papers 3170, Institute for the Study of Labor (IZA). [Downloadable!]
  7. Ed Hopkins, 2008. "Inequality, Happiness and Relative Concerns: What Actually is their Relationship?," Levine's Bibliography 122247000000001896, UCLA Department of Economics. [Downloadable!]
  8. Blanchflower, David G., 2008. "International Evidence on Well-being," IZA Discussion Papers 3354, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  9. Grosfeld, Irena & Senik, Claudia, 2008. "The Emerging Aversion to Inequality: Evidence from Poland 1992–2005," IZA Discussion Papers 3484, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  10. Ennio Bilancini & Massimo D'Antoni, 2008. "Pensions and Intergenerational Risk-Sharing When Relative Consumption Matters," Department of Economics University of Siena 541, Department of Economics, University of Siena. [Downloadable!]
  11. Richard Layard & Guy Mayraz & Stephen J. Nickell, 2007. "The Marginal Utility of Income," SOEPpapers 50, DIW Berlin, The German Socio-Economic Panel (SOEP). [Downloadable!]
    Other versions:
  12. Ed Hopkins, 2008. "Inequality, Happiness and Relative Concerns: What Actually is their Relationship?," ESE Discussion Papers 180, Edinburgh School of Economics, University of Edinburgh. [Downloadable!]
  13. Rafael Di Tella & Robert MacCulloch, 2007. "Happiness, Contentment and Other Emotions for Central Banks," NBER Working Papers 13622, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Drakopoulos, Stavros A., 2008. "The Concept Of Comparison Income: An Historical Perspective," MPRA Paper 8713, University Library of Munich, Germany. [Downloadable!]
  15. Binswanger, J., 2008. "A Simple Bounded-Rationality Life Cycle Model," Discussion Paper 2008-13, Tilburg University, Center for Economic Research. [Downloadable!]
  16. Clark, Andrew E. & Colombier, Nathalie & Masclet, David, 2008. "Never the Same After the First Time: The Satisfaction of the Second-Generation Self-Employed," IZA Discussion Papers 3476, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  17. Claudia Senik, 2007. "Direct Evidence on Income Comparisons and their Welfare Effects," IZA Discussion Papers 3195, Institute for the Study of Labor (IZA). [Downloadable!]
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