IDEAS home Printed from https://ideas.repec.org/a/eso/journl/v39y2008i2p105-130.html
   My bibliography  Save this article

A Dynamic Model of the Relationship Between Income and Financial Satisfaction: Evidence from Ireland

Author

Listed:
  • Carol Newman

    (Trinity College Dublin)

  • Liam Delaney

    (University College Dublin)

  • Brian Nolan

    (University College Dublin)

Abstract

The link between income and subjective satisfaction with one’s financial situation is explored in this paper using a panel analysis of 1,998 individuals tracked through the course of the boom period in Ireland, 1994-2001. A dynamic ordered probit model which incorporates state dependence and controls for correlated individual effects and the initial conditions problem is applied. The impact of the level of household income, the time-path of income and deviations of individual income from reference group income and household income are all considered. To the extent that income influences financial satisfaction, there is strong evidence from this paper that the level of household income has the most important effect but this effect is lessened once persistence in the data is controlled for and is diminishing at higher income levels. Controlling for income and socio-economic characteristics, the positive deviations of household income from reference group income are found to have a positive effect on financial satisfaction as are positive deviations of individual income from household income.

Suggested Citation

  • Carol Newman & Liam Delaney & Brian Nolan, 2008. "A Dynamic Model of the Relationship Between Income and Financial Satisfaction: Evidence from Ireland," The Economic and Social Review, Economic and Social Studies, vol. 39(2), pages 105-130.
  • Handle: RePEc:eso:journl:v:39:y:2008:i:2:p:105-130
    as

    Download full text from publisher

    File URL: http://www.esr.ie/Vol39_2/02-Newman.pdf
    File Function: First version, 2008
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Blanchflower, David G. & Oswald, Andrew J., 2004. "Well-being over time in Britain and the USA," Journal of Public Economics, Elsevier, vol. 88(7-8), pages 1359-1386, July.
    2. Andrew E. Clark, 2003. "Unemployment as a Social Norm: Psychological Evidence from Panel Data," Journal of Labor Economics, University of Chicago Press, vol. 21(2), pages 289-322, April.
    3. Kevin Denny & Orla Doyle, 2009. "Does Voting History Matter? Analysing Persistence in Turnout," American Journal of Political Science, John Wiley & Sons, vol. 53(1), pages 17-35, January.
    4. Easterlin, Richard A, 2001. "Income and Happiness: Towards an Unified Theory," Economic Journal, Royal Economic Society, vol. 111(473), pages 465-484, July.
    5. Charles F. Manski, 1993. "Identification of Endogenous Social Effects: The Reflection Problem," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 531-542.
    6. Vendrik, M.C.M. & Woltjer, G.B., 2006. "Happiness and loss aversion: when social participation dominates comparison," Research Memorandum 027, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    7. Verbeek, Marno & Nijman, Theo, 1992. "Testing for Selectivity Bias in Panel Data Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(3), pages 681-703, August.
    8. Stephen Pudney, 2008. "The dynamics of perception: modelling subjective wellbeing in a short panel," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 171(1), pages 21-40, January.
    9. Clark, Andrew E. & Oswald, Andrew J., 1996. "Satisfaction and comparison income," Journal of Public Economics, Elsevier, vol. 61(3), pages 359-381, September.
    10. Paul Contoyannis & Andrew M. Jones & Nigel Rice, 2004. "The dynamics of health in the British Household Panel Survey," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(4), pages 473-503.
    11. Ada Ferrer-i-Carbonell & Paul Frijters, 2004. "How Important is Methodology for the estimates of the determinants of Happiness?," Economic Journal, Royal Economic Society, vol. 114(497), pages 641-659, July.
    12. McBride, Michael, 2001. "Relative-income effects on subjective well-being in the cross-section," Journal of Economic Behavior & Organization, Elsevier, vol. 45(3), pages 251-278, July.
    13. Senik, Claudia, 2004. "When information dominates comparison: Learning from Russian subjective panel data," Journal of Public Economics, Elsevier, vol. 88(9-10), pages 2099-2123, August.
    14. van Praag, B. M. S. & Frijters, P. & Ferrer-i-Carbonell, A., 2003. "The anatomy of subjective well-being," Journal of Economic Behavior & Organization, Elsevier, vol. 51(1), pages 29-49, May.
    15. Frank, Robert H, 1997. "The Frame of Reference as a Public Good," Economic Journal, Royal Economic Society, vol. 107(445), pages 1832-1847, November.
    16. Lowenstein, George & Prelec, Drazen, 1991. "Negative Time Preference," American Economic Review, American Economic Association, vol. 81(2), pages 347-352, May.
    17. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March.
    18. Ferrer-i-Carbonell, Ada, 2005. "Income and well-being: an empirical analysis of the comparison income effect," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 997-1019, June.
    19. Winkelmann, Liliana & Winkelmann, Rainer, 1998. "Why Are the Unemployed So Unhappy? Evidence from Panel Data," Economica, London School of Economics and Political Science, vol. 65(257), pages 1-15, February.
    20. Andrew M. Jones & Xander Koolman & Nigel Rice, 2006. "Health‐related non‐response in the British Household Panel Survey and European Community Household Panel: using inverse‐probability‐weighted estimators in non‐linear models," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 169(3), pages 543-569, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Links and Notes from April 17th Whitaker Institute Talk on Well-Being
      by Liam Delaney in Economics and Psychology Research on 2013-05-04 00:32:00

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Waqas Ali & Rehman Javaid & Shujahat Ali3 & Yasir Akram & Ayaz Ul Haq, 2019. "Infl Uence Of Life Events On The Financial Satisfaction Of Individuals," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 15(1), pages 15-10.
    2. Junji Kageyama & Tsukasa Matsuura, 2018. "The Financial Burden of Having Children and Fertility Differentials Across Development and Life Stages: Evidence from Satisfaction Data," Journal of Happiness Studies, Springer, vol. 19(1), pages 1-26, January.
    3. 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.
    4. Wunder, Christoph, 2012. "Does subjective well-being dynamically adjust to circumstances?," Economics Letters, Elsevier, vol. 117(3), pages 750-752.
    5. Borooah, Vani & Dineen, Donal & Lynch, Nicola, 2010. "Health, Employment and the Quality of Life in Ireland," MPRA Paper 75682, University Library of Munich, Germany.
    6. Shalini Kalra Sahi, 2013. "Demographic and socio-economic determinants of financial satisfaction: A study of SEC-A segment of individual investors in India," International Journal of Social Economics, Emerald Group Publishing, vol. 40(2), pages 127-150, January.
    7. Alessio Fusco, 2016. "The Dynamics of Perceived Financial Difficulties," Journal of Happiness Studies, Springer, vol. 17(4), pages 1599-1614, August.
    8. Orcun Kaya, 2014. "Is perceived financial inadequacy persistent?," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 60(4), pages 636-654, December.
    9. FUSCO Alessio, 2013. "The dynamics of perceived financial difficulties," LISER Working Paper Series 2013-24, LISER.
    10. Ngamaba, Kayonda Hubert & Armitage, Christopher & Panagioti, Maria & Hodkinson, Alexander, 2020. "How closely related are financial satisfaction and subjective well-being? Systematic review and meta-analysis," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 85(C).
    11. Waqas Ali & Rehman Javaid & Shujahat Ali3 & Yasir Akram & Ayaz Ul Haq, 2019. "Infl Uence Of Life Events On The Financial Satisfaction Of Individuals," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 15(1), pages 123-137.
    12. Mduduzi Biyase & Cephas Naanwaab, 2021. "Rural–Urban Differences in Subjective Well-Being for South Africa: Static and Dynamic Approaches," Economic Development and Well-being Research Group Working Paper Series edwrg-03-2021, University of Johannesburg, College of Business and Economics, revised 2021.
    13. Kim, Bokyung & Jeong, Jinook, 2017. "Dynamics of adolescents’ life satisfaction and effect of class rank percentile: Evidence from Korean panel data," Journal of Economic Psychology, Elsevier, vol. 59(C), pages 8-28.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Liam Delaney & Carol Newman & Brian Nolan, 2006. "Reference Dependent Financial Satisfaction over the Course of the Celtic Tiger: A Panel Analysis Utilising the Living in Ireland Survey 1994-2001," Trinity Economics Papers tep200611, Trinity College Dublin, Department of Economics.
    2. repec:ucn:wpaper:10197/1110 is not listed on IDEAS
    3. Vendrik, Maarten C.M. & Woltjer, Geert B., 2007. "Happiness and loss aversion: Is utility concave or convex in relative income?," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1423-1448, August.
    4. repec:tcd:wpaper:tep11 is not listed on IDEAS
    5. Andrew E. Clark & Paul Frijters & Michael A. Shields, 2006. "Income and happiness: Evidence, explanations and economic implications," PSE Working Papers halshs-00590436, HAL.
    6. Marta Barazzetta, 2015. "The asymmetric effect of expectations on subjective well-being," Working Papers 374, ECINEQ, Society for the Study of Economic Inequality.
    7. Andrew E. Clark & Claudia Senik, 2010. "Will GDP growth increase happiness in developing countries?," PSE Working Papers halshs-00564985, HAL.
    8. Di Tella, Rafael & Haisken-De New, John & MacCulloch, Robert, 2010. "Happiness adaptation to income and to status in an individual panel," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 834-852, December.
    9. Cojocaru, Alexandru, 2014. "Fairness and inequality tolerance: Evidence from the Life in Transition Survey," Journal of Comparative Economics, Elsevier, vol. 42(3), pages 590-608.
    10. Liam Delaney & Carol Newman & Brian Nolan, 2006. "Reference Dependent Financial Satification over the Course of the Celtic Tiger : A Panel Analysis Utilising the Living in Ireland Survey 1994-2001," Working Papers 200609, Geary Institute, University College Dublin.
    11. Eduardo Pérez-Asenjo, 2011. "If happiness is relative, against whom do we compare ourselves? Implications for labour supply," Journal of Population Economics, Springer;European Society for Population Economics, vol. 24(4), pages 1411-1442, October.
    12. Vendrik, Maarten C.M. & Woltjer, Geert, 2006. "Happiness and Loss Aversion: When Social Participation Dominates Comparison," IZA Discussion Papers 2218, Institute of Labor Economics (IZA).
    13. Nikolaev, Boris, 2016. "Does other people's education make us less happy?," Economics of Education Review, Elsevier, vol. 52(C), pages 176-191.
    14. Senik, Claudia, 2009. "Direct evidence on income comparisons and their welfare effects," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 408-424, October.
    15. Maite Blázquez & Elena Cottini & Ainhoa Herrarte, 2014. "The socioeconomic gradient in health: how important is material deprivation?," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 12(2), pages 239-264, June.
    16. Alexandru Cojocaru, 2016. "Does Relative Deprivation Matter in Developing Countries: Evidence from Six Transition Economies," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 125(3), pages 735-756, February.
    17. Jones, Andrew M. & Wildman, John, 2008. "Health, income and relative deprivation: Evidence from the BHPS," Journal of Health Economics, Elsevier, vol. 27(2), pages 308-324, March.
    18. Senakpon F. A. Dedehouanou & Johan Swinnen & Miet Maertens, 2013. "Does Contracting Make Farmers Happy? Evidence from Senegal," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 59, pages 138-160, October.
    19. Konow, James & Earley, Joseph, 2008. "The Hedonistic Paradox: Is homo economicus happier," Journal of Public Economics, Elsevier, vol. 92(1-2), pages 1-33, February.
    20. Stavros Drakopoulos, 2008. "The paradox of happiness: towards an alternative explanation," Journal of Happiness Studies, Springer, vol. 9(2), pages 303-315, June.
    21. Ravallion, Martin & Lokshin, Michael, 2010. "Who cares about relative deprivation?," Journal of Economic Behavior & Organization, Elsevier, vol. 73(2), pages 171-185, February.
    22. Brown, Sarah & Gray, Daniel, 2016. "Household finances and well-being in Australia: An empirical analysis of comparison effects," Journal of Economic Psychology, Elsevier, vol. 53(C), pages 17-36.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eso:journl:v:39:y:2008:i:2:p:105-130. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://www.esr.ie .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Martina Lawless (email available below). General contact details of provider: https://www.esr.ie .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.