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Adaptation, anticipation and social interaction in happiness: An integrated error-correction approach

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  • Vendrik, Maarten C.M.

Abstract

Adaptation, anticipation and social-reference effects on happiness are strongly interrelated phenomena. However, in the existing empirical literature these phenomena are mainly studied in isolation from each other. Therefore, using SOEP panel data for the years 1984–2007, this study offers an integrated investigation of the implications of these three phenomena for the dynamics of individual life satisfaction. I focus on the short and long-run effects of income and social reference income, but I control for similar dynamics with respect to a large set of control variables. GMM estimates for instrumented income variables in an error-correction model indicate an insignificant future income effect, a significant and positive current income effect, and an insignificant long-run income effect on life satisfaction with significant hedonic adaptation. Social reference income has a significant, negative and strong impact in the long run, but not in the short run. Consequently, increasing own income and reference income by the same percentage tends to have an insignificant effect in the long term, but a significant and positive effect in the short term. Adaptation to an income shock and reinforcement of a reference income shock take place for more than 90% within three years. On the basis of these results a more comprehensive explanation of the Easterlin Paradox than those given in the literature is presented.

Suggested Citation

  • Vendrik, Maarten C.M., 2013. "Adaptation, anticipation and social interaction in happiness: An integrated error-correction approach," Journal of Public Economics, Elsevier, vol. 105(C), pages 131-149.
  • Handle: RePEc:eee:pubeco:v:105:y:2013:i:c:p:131-149
    DOI: 10.1016/j.jpubeco.2013.06.009
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    Cited by:

    1. Andrew E. Clark, 2015. "Adaptation and the Easterlin Paradox," PSE - Labex "OSE-Ouvrir la Science Economique" halshs-01112725, HAL.
    2. Sarah Jewell & Uma Kambhampati, 2012. "The Role of Personality in Adult Life Satisfaction," Economics & Management Discussion Papers em-dp2012-02, Henley Business School, Reading University.
    3. Ozge Gokdemir, 2015. "Consumption, savings and life satisfaction: the Turkish case," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 62(2), pages 183-196, June.
    4. Montizaan, Raymond M. & Vendrik, Maarten C.M., 2014. "Misery Loves Company: Exogenous shocks in retirement expectations and social comparison effects on subjective well-being," Journal of Economic Behavior & Organization, Elsevier, vol. 97(C), pages 1-26.
    5. Cheng, Zhiming & King, Stephen P. & Smyth, Russell & Wang, Haining, 2016. "Housing property rights and subjective wellbeing in urban China," European Journal of Political Economy, Elsevier, vol. 45(S), pages 160-174.
    6. Dumludag, Devrim & Gokdemir, Ozge & Vendrik, Maarten C.M., 2015. "Relative Income and Life Satisfaction of Turkish Immigrants: The Impact of a Collectivistic Culture," IZA Discussion Papers 9282, Institute for the Study of Labor (IZA).
    7. Edsel Beja, 2014. "Income growth and happiness: reassessment of the Easterlin Paradox," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 61(4), pages 329-346, December.
    8. Hovi Matti & Laamanen Jani-Petri, 2017. "Adaptation and Loss Aversion in the Relationship between GDP and Subjective Well-being," Working Papers 1717, University of Tampere, School of Management, Economics.
    9. Fabrice Etilé & Paul Frijters & David W. Johson & Michael A. Shields, 2017. "Modelling Heterogeneity in the Resilience to Major Socioeconomic Life Events," PSE Working Papers halshs-01485989, HAL.
    10. Kitae Sohn, 2016. "The Role of Spousal Income in the Wife’s Happiness," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 126(3), pages 1007-1024, April.
    11. Sun Youn Lee & Fumio Ohtake, 2018. "How Conscious Are You of Others? Further Evidence on Relative Income and Happiness," ISER Discussion Paper 1022, Institute of Social and Economic Research, Osaka University.
    12. Andrew E. Clark, 2015. "Adaptation and the Easterlin Paradox," Working Papers halshs-01112725, HAL.
    13. Devrim Dumludag & Ozge Gokdemir & Selay Giray, 2016. "Income comparison, collectivism and life satisfaction in Turkey," Quality & Quantity: International Journal of Methodology, Springer, vol. 50(3), pages 955-980, May.
    14. Welsch, Heinz & Kühling, Jan, 2015. "Income comparison, income formation, and subjective well-being: New evidence on envy versus signaling," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 59(C), pages 21-31.
    15. Sarah Jewell & Uma Kambhampati, 2015. "Are Happy Youth Also Satisfied Adults? An Analysis of the Impact of Childhood Factors on Adult Life Satisfaction," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 121(2), pages 543-567, April.
    16. Angela Faßhauer & Katrin Rehdanz, 2015. "Estimating Benefits from Regional Amenities: Internal Migration and Life Satisfaction," SOEPpapers on Multidisciplinary Panel Data Research 748, DIW Berlin, The German Socio-Economic Panel (SOEP).
    17. Beja Jr., Edsel, 2014. "Income growth and happiness: Reassessment of the Easterlin Paradox," MPRA Paper 53360, University Library of Munich, Germany.

    More about this item

    Keywords

    Happiness; Life satisfaction; Adaptation; Anticipation; Social comparison; Error correction model;

    JEL classification:

    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
    • D6 - Microeconomics - - Welfare Economics

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