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A Reassessment of the Relationship Between GDP and Life Satisfaction

  • Proto, Eugenio

    (University of Warwick)

  • Rustichini

    (University of Minnesota)

Determining the relation between life satisfaction and aggregate income at country level has been problematic, because cross-country and times-series analysis generally give different conclusions. Here we analyze this relation without imposing any polynomial structure to the estimated model and eliminating potentially confounding country-specific factors. We show the existence of a bliss point in the interval between 26,000$ and 30,000$ (2005 in PPP) in relationship between individual life satisfaction and GDP. An almost identical result is found when the relationship between aggregate income of Western European regions and life satisfaction of their residents is analyzed: in this case, data suggest a bliss point between 30,000$ and 33,000$. In both samples, we nd rst evidence of a decreasing level of life satisfaction after the bliss points. Therefore, the analysis overall shows the existence of a hump-shaped pattern between GDP and life satisfaction. We discuss possible explanations of the hump shaped pattern linked to external effects of the aggregate income on life satisfaction due, for example, to habit formation and income comparison and present an econometric test of this potential explanation based on some recent findings of the ve-factor personality theory.

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Paper provided by Competitive Advantage in the Global Economy (CAGE) in its series CAGE Online Working Paper Series with number 94.

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Date of creation: 2012
Date of revision:
Handle: RePEc:cge:wacage:94
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  1. Stevenson, Betsey & Wolfers, Justin, 2008. "Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox," IZA Discussion Papers 3654, Institute for the Study of Labor (IZA).
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  3. Luttmer, Erzo F. P., 2004. "Neighbors as Negatives: Relative Earnings and Well-Being," Working Paper Series rwp04-029, Harvard University, John F. Kennedy School of Government.
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  5. Andrew Clark & Fabrice Etilé & Fabien Postel-Vinay & Claudia Senik & Karine Van Der Straeten, 2004. "Heterogeneity in reported well-being:Evidence from twelve European countries," PSE Working Papers hal-00242916, HAL.
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  8. Layard, R. & Mayraz, G. & Nickell, S., 2008. "The marginal utility of income," Journal of Public Economics, Elsevier, vol. 92(8-9), pages 1846-1857, August.
  9. Oswald, Andrew J. & Wu, Stephen, 2010. "Objective Confirmation of Subjective Measures of Human Well-being: Evidence from the USA," IZA Discussion Papers 4695, Institute for the Study of Labor (IZA).
  10. Angelini, V.; & Cavapozzi, D.; & Corazzini L.; & Paccagnell O.;, 2011. "Do Danes and Italians Rate Life Satisfaction in the Same Way? Using Vignettes to Correct for Individual-Specific Scale Biases," Health, Econometrics and Data Group (HEDG) Working Papers 11/20, HEDG, c/o Department of Economics, University of York.
  11. Angus Deaton, 2008. "Income, Health, and Well-Being around the World: Evidence from the Gallup World Poll," Journal of Economic Perspectives, American Economic Association, vol. 22(2), pages 53-72, Spring.
  12. Easterlin, Richard A., 1995. "Will raising the incomes of all increase the happiness of all?," Journal of Economic Behavior & Organization, Elsevier, vol. 27(1), pages 35-47, June.
  13. Richard Easterlin, 2005. "Feeding the Illusion of Growth and Happiness: A Reply to Hagerty and Veenhoven," Social Indicators Research, Springer, vol. 74(3), pages 429-443, December.
  14. Andrew Caplin & Mark Dean, 2008. "Dopamine, Reward Prediction Error, and Economics," The Quarterly Journal of Economics, MIT Press, vol. 123(2), pages 663-701, 05.
  15. Alois Stutzer, . "The Role of Income Aspirations in Individual Happiness," IEW - Working Papers 124, Institute for Empirical Research in Economics - University of Zurich.
  16. Easterlin, Richard A., 2005. "A puzzle for adaptive theory," Journal of Economic Behavior & Organization, Elsevier, vol. 56(4), pages 513-521, April.
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