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Relative Standing and Life-Satisfaction: Does Unobserved Heterogeneity Matter?

  • Alem, Yonas


    (Department of Economics, School of Business, Economics and Law, Göteborg University)

Unlike most studies of subjective well-being in developing countries, we use a fixed effects regression on three rounds of rich panel data to investigate the impact of relative standing on life satisfaction of respondents in urban Ethiopia. We find a consistently large negative impact of relative standing - both relative to others and to oneself over time - on subjective well-being. However, controlling for unobserved heterogeneity through a fixed effects model reduces the impact of the relative standing variables on subjective well-being by up to 24 percent and reduces the impact of economic status by about 40 percent. Our findings highlight the need to be cautious in interpreting parameter estimates from subjective well-being regressions based on cross-sectional data, as the impact of variables may not be disentangled from that of unobserved heterogeneity.

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Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 579.

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Length: 20 pages
Date of creation: 10 Dec 2013
Date of revision:
Handle: RePEc:hhs:gunwpe:0579
Contact details of provider: Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
Phone: 031-773 10 00
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  1. Nick Carroll & Paul Frijters & Michael Shields, 2009. "Quantifying the costs of drought: new evidence from life satisfaction data," Journal of Population Economics, Springer, vol. 22(2), pages 445-461, April.
  2. Asadullah, Niaz & Chaudhury, Nazmul, 2012. "Subjective Well-Being and Relative Poverty in Rural Bangladesh," IZA Discussion Papers 6569, Institute for the Study of Labor (IZA).
  3. David G. Blanchflower & Andrew J. Oswald, 2004. "Money, Sex, and Happiness: An Empirical Study," NBER Working Papers 10499, National Bureau of Economic Research, Inc.
  4. Clark, Andrew E. & Kristensen, Nicolai & Westergård-Nielsen, Niels C., 2007. "Job Satisfaction and Co-worker Wages: Status or Signal?," IZA Discussion Papers 3073, Institute for the Study of Labor (IZA).
  5. Geeta Kingdon & John Knight, 2005. "Community, Comparisons and Subjective Well-being in a Divided Society," Working Papers 05095, University of Cape Town, Development Policy Research Unit.
  6. Clark, Andrew E. & Senik, Claudia, 2009. "Who Compares to Whom? The Anatomy of Income Comparisons in Europe," IZA Discussion Papers 4414, Institute for the Study of Labor (IZA).
  7. Erzo F. P. Luttmer, 2005. "Neighbors as Negatives: Relative Earnings and Well-Being," The Quarterly Journal of Economics, MIT Press, vol. 120(3), pages 963-1002, August.
  8. Ferrer-i-Carbonell, Ada, 2005. "Income and well-being: an empirical analysis of the comparison income effect," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 997-1019, June.
  9. Alem, Yonas & Colmer, Jonathan, 2013. "Optimal Expectations and the Welfare Cost of Climate Variability," Working Papers in Economics 578, University of Gothenburg, Department of Economics.
  10. Clark, Andrew E. & Kristensen, Nicolai & Westergård-Nielsen, Niels C., 2008. "Economic Satisfaction and Income Rank in Small Neighbourhoods," IZA Discussion Papers 3813, Institute for the Study of Labor (IZA).
  11. Carol Graham & Andrew Felton, 2006. "Inequality and happiness: Insights from Latin America," Journal of Economic Inequality, Springer, vol. 4(1), pages 107-122, April.
  12. Guglielmo Maria Caporale & Yannis Georgellis & Nicholas Tsitsianis & Ya Ping Yin, 2007. "Income and Happiness across Europe: Do Reference Values Matter?," CESifo Working Paper Series 2146, CESifo Group Munich.
  13. Yonas Alem & Gunnar Köhlin, 2014. "The Impact of Food Price Inflation on Subjective Well-being: Evidence From Urban Ethiopia," Social Indicators Research, Springer, vol. 116(3), pages 853-868, May.
  14. Ravallion, Martin & Lokshin, Michael, 2005. "Who cares about relative deprivation ?," Policy Research Working Paper Series 3782, The World Bank.
  15. Bookwalter, Jeffrey T. & Dalenberg, Douglas R., 2010. "Relative to What or Whom? The Importance of Norms and Relative Standing to Well-Being in South Africa," World Development, Elsevier, vol. 38(3), pages 345-355, March.
  16. KNIGHT, John & SONG, Lina & GUNATILAKA, Ramani, 2009. "Subjective well-being and its determinants in rural China," China Economic Review, Elsevier, vol. 20(4), pages 635-649, December.
  17. Richard Adams, 2011. "Evaluating the Economic Impact of International Remittances On Developing Countries Using Household Surveys: A Literature Review," Journal of Development Studies, Taylor & Francis Journals, vol. 47(6), pages 809-828.
  18. Guillen-Royo, Monica, 2011. "Reference group consumption and the subjective wellbeing of the poor in Peru," Journal of Economic Psychology, Elsevier, vol. 32(2), pages 259-272, March.
  19. 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.
  20. Alem, Yonas & Söderbom, Måns, 2012. "Household-Level Consumption in Urban Ethiopia: The Effects of a Large Food Price Shock," World Development, Elsevier, vol. 40(1), pages 146-162.
  21. Fredrik Carlsson & Gautam Gupta & Olof Johansson-Stenman, 2009. "Keeping up with the Vaishyas? Caste and relative standing in India," Oxford Economic Papers, Oxford University Press, vol. 61(1), pages 52-73, January.
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