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Easterlin-types and Frustrated Achievers: the Heterogeneous Effects of Income Changes on Life Satisfaction

  • Becchetti, L.
  • Corrado, L.
  • Rossetti , F.

Most philosophers and social scientists argue that the relationship between life satisfaction and its determinants is intermediated by cultural drivers (education, race, gender, religion, regional cultural background, etc.) and that (as suggested by descriptive evidence on "frustrated achievers") the relationship between changes in income and changes in life satisfaction is not necessarily positive. We investigate such relationship across the waves of the British Household Panel Study. By using a latent class approach which accounts for slope heterogeneity, omitted variable bias and departures from normality assumptions we have the unique opportunity of identifying determinants of the income-life satisfaction relationship and testing econometrically for the existence of “frustrated achievement". Our findings reveal the presence of a vast majority of "Easterlin-type" individuals with positive but very weak relationship between changes in income and changes in life satisfaction and a small minority (2 percent) of frustrated achievers with negative relationship. Such share is much below descriptive evidence on frustrated achievement (17.5 percent). The probability of belonging to such group is shown to be positively related with divorced status and negatively related to education and relative (personal to reference group) income. Our interpretation of these results is that the standard concave money-life satisfaction relationship provides a partial and incomplete picture of the complex nexus between life satisfaction and income as it does not take into account two important phenomena: the role of peers and of reference group income and that of the dynamics between realisations and expectations. The paradox of a negative relationship between changes in income and changes in life satisfaction may be explained by the fact that, in spite of a positive income change, the change in individual expectations and of peers income may be even higher, thereby generating the negative change in satisfaction.

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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0816.

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Length: 24
Date of creation: Apr 2008
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Handle: RePEc:cam:camdae:0816
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