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Does the Risk of Poverty Reduce Happiness?

  • Stefano A. Caria

    ()

    (University of Oxford)

  • Paolo Falco

    ()

    (University of Oxford)

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File URL: http://www.dagliano.unimi.it//media/WP2014_363.pdf
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Paper provided by Centro Studi Luca d\'Agliano, University of Milano in its series Development Working Papers with number 363.

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Length: 45
Date of creation: 07 Apr 2014
Date of revision: 07 Apr 2014
Handle: RePEc:csl:devewp:363
Note: We investigate the unexplored link between the risk of poverty and happiness in the context of a developing country. Using unique longitudinal data, we estimate workers’ vulnerability to income-poverty and find a strong negative relationship between vulnerability and happiness, over and above a positive income effect. The result is robust and cannot be reduced to the effect of two-sided uncertainty. A matched behavioural experiment shows that respondents are significantly loss-averse. We conclude that downside risk is an important determinant of happiness and of economic decisions under uncertainty. Policies that mitigate downward risk may thus have direct impacts on both well-being and efficiency.
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