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