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On the relation between income inequality and happiness: Do fairness perceptions matter?

  • Christian Bjornskov


    (Nationalökonomisk Institut (Department of Economics), Aarhus School of Business, Aarhus Universitet)

  • Axel Dreher


    (University of Goettingen, Center for European, Governance and Economic Development Research)

  • Justina A.V. Fischer


    (University of Hamburg, Institute for Public Finance)

  • Jan Schnellenbach


    (Alfred Weber Institute for Social Policy and Political Economy, Ruprecht-Karls-Universität Heidelberg)

In this paper, we revisit the association between happiness and inequality. We argue that the perceived fairness of the income generation process affects this association. Building on a two-period model of individual life-time utility maximization, we predict that persons with higher perceived fairness will experience higher levels of life-time utility and are less in favor of income redistribution. In societies with a high level of actual social mobility, income inequality is perceived more positively with increased expected fairness. The opposite is expected for countries with low actual social mobility, due to an increasing relevance of a disappointment effect resulting from unsuccessful individual investments. Using the World Values Survey data and a broad set of fairness measures, we find strong support for the negative (positive) association between fairness perceptions and the demand for more equal incomes (subjective well-being). We also find strong empirical support for the disappointment effect in low social mobility countries. In contrast, the results for high-mobility countries turn out to be ambiguous.

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Paper provided by Chair for Economic Policy, University of Hamburg in its series Working Papers with number 027.

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Length: 56 pages
Date of creation: 2009
Date of revision:
Publication status: Published in Hamburg Contemporary Economic Discussions, Issue 27, 2009
Handle: RePEc:hce:wpaper:027
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  2. Dohmen, Thomas & Falk, Armin & Huffman, David & Marklein, Felix & Sunde, Uwe, 2009. "Biased probability judgment: Evidence of incidence and relationship to economic outcomes from a representative sample," Journal of Economic Behavior & Organization, Elsevier, vol. 72(3), pages 903-915, December.
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  5. Christian Bjørnskov & Axel Dreher & Justina A.V. Fischer, 2006. "Cross-Country Determinants of Life Satisfaction: Exploring Different Determinants across Groups in Society," KOF Working papers 06-145, KOF Swiss Economic Institute, ETH Zurich.
  6. Alberto Alesina & Eliana La Ferrara, 2001. "Preferences for Redistribution in the Land of Opportunities," Harvard Institute of Economic Research Working Papers 1936, Harvard - Institute of Economic Research.
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  19. Fischer, Justina AV, 2009. "Subjective Well-Being as Welfare Measure: Concepts and Methodology," MPRA Paper 16619, University Library of Munich, Germany.
  20. Ed Hopkins, 2008. "Inequality, Happiness and Relative Concerns: What Actually is their Relationship?," Levine's Bibliography 122247000000001896, UCLA Department of Economics.
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  23. Irena Grosfeld & Claudia Senik, 2009. "The emerging aversion to inequality - Evidence from long subjective data," PSE Working Papers halshs-00586788, HAL.
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