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Income and Happiness across Europe: Do Reference Values Matter?

  • Guglielmo Maria Caporale
  • Yannis Georgellis
  • Nicholas Tsitsianis
  • Ya Ping Yin

Using data from the European Social Survey (ESS), we examine the link between income and subjective well-being. We find that, for the whole sample of nineteen European countries, although income is positively correlated with both happiness and life satisfaction, reference income exerts a negative effect on individual well-being, a result consistent with the relative utility hypothesis. Performing separate analyses for some Eastern European countries, we also find some evidence of a ‘tunnel effect’, in that reference income has a positive impact on subjective well-being. Our findings support the view that in environments with stable income and employment, reference income serves as a basis for social comparisons, whereas in relatively volatile environments, it is used as a source of information for forming expectations about future status.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2146.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_2146
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