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On the relation between income inequality and happiness: Do fairness perceptions matter?

  • Bjørnskov, Christian
  • Dreher, Axel
  • Fischer, Justina A. V.
  • Schnellenbach, Jan

In this paper, we revisit the association between happiness and inequality. We argue that the perceived fairness of the income generation process affects this association. Building on a two-period model of individual life-time utility maximization, we predict that persons with higher perceived fairness will experience higher levels of life-time utility and are less in favor of income redistribution. In societies with a high level of actual social mobility, income inequality is perceived more positively with increased expected fairness. The opposite is expected for countries with low actual social mobility, due to an increasing relevance of a disappointment effect resulting from unsuccessful individual investments. Using the World Values Survey data and a broad set of fairness measures, we find strong support for the negative (positive) association between fairness perceptions and the demand for more equal incomes (subjective well-being). We also find strong empirical support for the disappointment effect in low social mobility countries. In contrast, the results for high-mobility countries turn out to be ambiguous.

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Paper provided by University of Heidelberg, Department of Economics in its series Working Papers with number 0495.

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Date of creation: 15 Jan 2010
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Handle: RePEc:awi:wpaper:0495
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  1. Alberto Alesina & Eliana La Ferrara, 2001. "Preferences for Redistribution in the Land of Opportunities," NBER Working Papers 8267, National Bureau of Economic Research, Inc.
  2. Dohmen, Thomas & Falk, Armin & Huffman, David B. & Marklein, Felix & Sunde, Uwe, 2009. "Biased Probability Judgment: Evidence of Incidence and Relationship to Economic Outcomes from a Representative Sample," IZA Discussion Papers 4170, Institute for the Study of Labor (IZA).
  3. Andrew E. Clark & Paul Frijters & Michael A. Shields, 2008. "Relative income, happiness, and utility: An explanation for the Easterlin paradox and other puzzles," Post-Print halshs-00754299, HAL.
  4. Blanchflower, David G. & Oswald, Andrew J., 2001. "Well-Being Over Time in Britain and the USA," The Warwick Economics Research Paper Series (TWERPS) 616, University of Warwick, Department of Economics.
  5. Hopkins, Ed, 2008. "Inequality, Happiness and Relative Concerns: What Actually is their Relationship?," SIRE Discussion Papers 2008-01, Scottish Institute for Research in Economics (SIRE).
  6. Andrew CLARK & Emanuela D'ANGELO, 2010. "Upward Social Mobility, Well-being and;Political Preferences: Evidence from the;BHPS," Working Papers 338, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
  7. Fehr, Ernst & Schmidt, Klaus M., . "A theory of fairness, competition, and cooperation," Chapters in Economics, University of Munich, Department of Economics.
  8. Alesina, Alberto & Di Tella, Rafael & MacCulloch, Robert, 2004. "Inequality and happiness: are Europeans and Americans different?," Journal of Public Economics, Elsevier, vol. 88(9-10), pages 2009-2042, August.
  9. Justina A.V. Fischer, 2009. "The Welfare Effects of Social Mobility," OECD Social, Employment and Migration Working Papers 93, OECD Publishing.
  10. Richard Layard & Guy Mayraz & Stephen Nickell, 2009. "Does relative income matter? Are the critics right?," LSE Research Online Documents on Economics 28594, London School of Economics and Political Science, LSE Library.
  11. Bruno S. Frey & Alois Stutzer, 2005. "Beyond outcomes: measuring procedural utility," Oxford Economic Papers, Oxford University Press, vol. 57(1), pages 90-111, January.
  12. Hirschman, Albert O., 1973. "The changing tolerance for income inequality in the course of economic development," World Development, Elsevier, vol. 1(12), pages 29-36, December.
  13. Christian Bjørnskov & Axel Dreher & Justina A.V. Fischer, 2006. "Cross-Country Determinants of Life Satisfaction: Exploring Different Determinants across Groups in Society," KOF Working papers 06-145, KOF Swiss Economic Institute, ETH Zurich.
  14. Kohei Kawamura, 2008. "Communication for Public Goods," ESE Discussion Papers 182, Edinburgh School of Economics, University of Edinburgh.
  15. Corneo, Giacomo & Grüner, Hans Peter, 2001. "Individual Preferences for Political Redistribution," CEPR Discussion Papers 2694, C.E.P.R. Discussion Papers.
  16. Ada Ferrer-i-Carbonell & Paul Frijters, 2002. "How important is Methodology for the Estimates of the Determinants of Happiness?," Tinbergen Institute Discussion Papers 02-024/3, Tinbergen Institute.
  17. La Ferrara, Eliana & Alesina, Alberto, 2005. "Preferences for Redistribution in the Land of Opportunities," Scholarly Articles 4552533, Harvard University Department of Economics.
  18. Justina A.V. Fischer, 2009. "Happiness and Age Cycles - Return to Start...?: On the Functional Relationship between Subjective Well-Being and Age," OECD Social, Employment and Migration Working Papers 99, OECD Publishing.
  19. Fischer, Justina AV, 2009. "Subjective Well-Being as Welfare Measure: Concepts and Methodology," MPRA Paper 16619, University Library of Munich, Germany.
  20. Irena Grosfeld & Claudia Senik, 2009. "The emerging aversion to inequality - Evidence from long subjective data," PSE Working Papers halshs-00586788, HAL.
  21. Ruut Veenhoven, 2000. "The Four Qualities of Life," Journal of Happiness Studies, Springer, vol. 1(1), pages 1-39, March.
  22. Fischer, Justina AV, 2009. "Happiness and age cycles – return to start…," MPRA Paper 15249, University Library of Munich, Germany.
  23. Ravallion, Martin & Lokshin, Michael, 2000. "Who wants to redistribute?: The tunnel effect in 1990s Russia," Journal of Public Economics, Elsevier, vol. 76(1), pages 87-104, April.
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