Are You Satisfied with Your Income? The Economics of Happiness in India

One of the most enduring debates in the human well-bing research is the relationship between money and happiness. Empirical research both in psychology and in economics show that the correlation between income and happiness is small and this evidence has been used to mean that money does not matter for life satisfaction. This raises an important question that if money does not buy happiness, why most people are after money and material pursuits? This apparent puzzle - known as Easterlin Paradox - has been explained in terms of relative income comparisons. As individuals care greatly about their relative income to others, a rise in the income levels of all people does not raise the happiness level of the individuals. This paper empirically analyses the relation between income and happiness in India using a primary sample data. The estimated ordered probit results show significant positive effects on happiness of both absolute and relative income. This suggests that money does influence happiness and well-being and the individual's life satisfaction is largely influenced by his relative status. When interactions between absolute income and relative income are allowed the relative income effect vanishes suggesting that proportionate shifts in the relative position does not change happiness level. An increase in absolute income may raise happiness, and beyond a certain threshold level people develop aspirations for status positions and hence more money may not bring more happiness.