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Experienced versus Decision Utility: Large-Scale Comparison for Income-Leisure Preferences

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  • Alpaslan AKAY
  • Olivier BARGAIN
  • H. Xavier JARA

Abstract

Subjective well-being (SWB) data is increasingly used to perform welfare analysis. Interpreted as ‘experienced utility’, it has recently been compared to ‘decision utility’ using small-scale experiments most often based on stated preferences. We transpose this comparison to the framework of non-experimental and large-scale data commonly used for policy analysis, focusing on the income-leisure domain where redistributive policies operate. Using the British Household Panel Survey, we suggest a ‘deviation’ measure, which is simply the difference between actual working hours and SWB-maximizing hours. We show that about three-quarters of individuals make decisions that are not inconsistent with maximizing their SWB. We discuss the potential channels that explain the lack of optimization when deviations are significantly large. We find proxies for a number of individual and external constraints, and show that constraints alone can explain at least half of the deviations. In our context, deviations partly reflect the inability of the revealed preference approach to account for labor market rigidities, so the actual and SWB-maximizing hours should be used in a complementary manner. The suggested approach based on our deviation metric could help identify labor market frictions.

Suggested Citation

  • Alpaslan AKAY & Olivier BARGAIN & H. Xavier JARA, 2022. "Experienced versus Decision Utility: Large-Scale Comparison for Income-Leisure Preferences," Bordeaux Economics Working Papers 2022-23, Bordeaux School of Economics (BSE).
    • Handle: RePEc:grt:bdxewp:2022-23
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    More about this item

    Keywords

    Decision Utility; Experienced Utility; Labor Supply; Subjective Well-Being;
    All these keywords.

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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