Impacts of liquidity constraints, wealth and debt on happiness

Drawing on data from the China Household Finance Survey (CHFS) and employing the ordered logit model, this study investigates the joint effect of liquidity constraints and debt on household happiness. The analysis reveals that (i) the happiness of Hand-to-Mouth (HtM) households ensnared by liquidity constraints significantly lag behind that of their non-HtM counterparts; (ii) the impact of liquidity constraints on happiness varies across different wealth brackets of HtM households. In particular, the decrease in happiness among wealthy HtM households (holding positive illiquid assets) due to liquidity constraints is less pronounced than the decline experienced by less wealthy HtM households (holding non-positive illiquid assets); (iii) indebted HtM households with permanent liquidity constraints manifest distinctly lower happiness compared to those facing temporary constraints. To address potential endogeneity concerns, propensity score matching is employed, and various metrics of happiness and liquidity constraints are utilized as robustness measures, all of which affirm the aforementioned conclusions. These findings underscore the need for tailored policy interventions that acknowledge the heterogeneous nature of household financial circumstances. Policymakers should consider targeted support mechanisms for HtM households grappling with liquidity constraints, while also recognizing the differential impact of such constraints based on wealth levels.