Incomes, aspiration adaptation, and happiness: Evidence from China

This study examines the comparative associations between household and neighbor income and subjective well-being (SWB) while considering the adaptations of income aspiration and reference income. To characterize the adaptations, we leverage the quasi-experimental design in which farmlands were pre-allocated to households according to household size during China’s initial rural reforms in the 1980s. Our designed survey covers 11 entire neighborhoods in China and alleviates concerns about sorting into neighborhoods, occupational effects, and survey participation bias. We find that reference income adapts almost perfectly to the neighborhood and is positively correlated with SWB, measured by life satisfaction. Conversely, income aspiration adapts perfectly to the household’s income, and is negatively correlated with life satisfaction. Adjusted with the adaptations, the association between household income and life satisfaction outperforms that of neighbor income. Doubling the income of all households within the neighborhoods increases life satisfaction by around 0.3–0.5. Our approach yields the most conservative estimates of SWB gains compared with existing common approaches.