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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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File URL: http://www.hced.uni-hamburg.de/WorkingPapers/HCED-027.pdf
File Function: First version, 2009
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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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  1. Christian Bjørnskov & Axel Dreher & Justina A. V. Fischer, 2006. "Cross-country determinants of life satisfaction: exploring different determinants across groups in society," LSE Research Online Documents on Economics 19290, London School of Economics and Political Science, LSE Library.
  2. Ed Hopkins, 2008. "Inequality, Happiness and Relative Concerns: What Actually is their Relationship?," ESE Discussion Papers 180, Edinburgh School of Economics, University of Edinburgh.
  3. Fehr, Ernst & Schmidt, Klaus M., . "A theory of fairness, competition, and cooperation," Chapters in Economics, University of Munich, Department of Economics.
  4. 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.
  5. Alesina, Alberto F & Di Tella, Rafael & MacCulloch, Robert, 2001. "Inequality and Happiness: Are Europeans and Americans Different?," CEPR Discussion Papers 2877, C.E.P.R. Discussion Papers.
  6. Dohmen, Thomas & Falk, Armin & Huffman, David B. & Marklein, Felix & Sunde, Uwe, 2009. "Biased Probability Judgment: Evidence of Incidence and Relationship to Economic Outcomes from a Representative Sample," IZA Discussion Papers 4170, Institute for the Study of Labor (IZA).
  7. Ada Ferrer-i-Carbonell & Paul Frijters, 2002. "How important is Methodology for the Estimates of the Determinants of Happiness?," Tinbergen Institute Discussion Papers 02-024/3, Tinbergen Institute.
  8. Blanchflower, David G. & Oswald, Andrew J., 2001. "Well-Being Over Time in Britain and the USA," The Warwick Economics Research Paper Series (TWERPS) 616, University of Warwick, Department of Economics.
  9. Fischer, Justina AV, 2009. "Happiness and age cycles – return to start…," MPRA Paper 15249, University Library of Munich, Germany.
  10. Irena Grosfeld & Claudia Senik, 2009. "The emerging aversion to inequality - Evidence from long subjective data," PSE Working Papers halshs-00586788, HAL.
  11. Bruno S. Frey & Alois Stutzer, . "Beyond Outcomes: Measuring Procedural Utility," IEW - Working Papers 076, Institute for Empirical Research in Economics - University of Zurich.
  12. Fischer, Justina AV, 2009. "Subjective Well-Being as Welfare Measure: Concepts and Methodology," MPRA Paper 16619, University Library of Munich, Germany.
  13. Corneo, Giacomo & Grüner, Hans Peter, 2001. "Individual Preferences for Political Redistribution," CEPR Discussion Papers 2694, C.E.P.R. Discussion Papers.
  14. Richard Layard & Guy Mayraz & Stephen Nickell, 2009. "Does Relative Income Matter? Are the Critics Right?," CEP Discussion Papers dp0918, Centre for Economic Performance, LSE.
  15. Ravallion, Martin & Lokshin, Michael, 2000. "Who wants to redistribute?: The tunnel effect in 1990s Russia," Journal of Public Economics, Elsevier, vol. 76(1), pages 87-104, April.
  16. Andrew E. Clark & Emanuela D'Angelo, 2013. "Upward Social Mobility, Well-being and Political Preferences: Evidence from the BHPS," CEP Discussion Papers dp1252, Centre for Economic Performance, LSE.
  17. Kohei Kawamura, 2008. "Inequality, Happiness and Relative Concerns: What Actually is their Relationship?," ESE Discussion Papers 182, Edinburgh School of Economics, University of Edinburgh.
  18. La Ferrara, Eliana & Alesina, Alberto, 2005. "Preferences for Redistribution in the Land of Opportunities," Scholarly Articles 4552533, Harvard University Department of Economics.
  19. Justina A.V. Fischer, 2009. "The Welfare Effects of Social Mobility," OECD Social, Employment and Migration Working Papers 93, OECD Publishing.
  20. Ruut Veenhoven, 2000. "The Four Qualities of Life," Journal of Happiness Studies, Springer, vol. 1(1), pages 1-39, March.
  21. Clark, Andrew E. & Frijters, Paul & Shields, Michael A., 2007. "Relative Income, Happiness and Utility: An Explanation for the Easterlin Paradox and Other Puzzles," IZA Discussion Papers 2840, Institute for the Study of Labor (IZA).
  22. Justina A.V. Fischer, 2009. "Happiness and Age Cycles - Return to Start...?: On the Functional Relationship between Subjective Well-Being and Age," OECD Social, Employment and Migration Working Papers 99, OECD Publishing.
  23. Hirschman, Albert O., 1973. "The changing tolerance for income inequality in the course of economic development," World Development, Elsevier, vol. 1(12), pages 29-36, December.
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