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Relative Income, Happiness and Utility: An Explanation for the Easterlin Paradox and Other Puzzles

  • Clark, Andrew E.

    ()

    (Paris School of Economics)

  • Frijters, Paul

    ()

    (University of Queensland)

  • Shields, Michael A.

    ()

    (Monash University)

The well-known Easterlin paradox points out that average happiness has remained constant over time despite sharp rises in GNP per head. At the same time, a micro literature has typically found positive correlations between individual income and individual measures of subjective well-being. This paper suggests that these two findings are consistent with the presence of relative income terms in the utility function. Income may be evaluated relative to others (social comparison) or to oneself in the past (habituation). We review the evidence on relative income from the subjective well-being literature. We also discuss the relation (or not) between happiness and utility and discuss some non-happiness research (behavioural, experimental, neurological) dealing with income comparisons. We last consider how relative income in the utility function affects economic models of behaviour in a number of different domains.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2840.

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Length: 68 pages
Date of creation: Jun 2007
Date of revision:
Publication status: published in: Journal of Economic Literature, 2008, 46 (1), 95-144
Handle: RePEc:iza:izadps:dp2840
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  1. Stark, Oded, 2006. "Inequality and migration: A behavioral link," Economics Letters, Elsevier, vol. 91(1), pages 146-152, April.
  2. Stark, Oded, 2005. "Status Aspirations, Wealth Inequality, and Economic Growth," Economics Series 166, Institute for Advanced Studies.
  3. Vendrik, Maarten C. M., 1998. "Unstable bandwagon and habit effects on labor supply," Journal of Economic Behavior & Organization, Elsevier, vol. 36(2), pages 235-255, August.
  4. P. J. Sloane & H. Williams, 2000. "Job Satisfaction, Comparison Earnings, and Gender," LABOUR, CEIS, vol. 14(3), pages 473-502, 09.
  5. Vernon L. Smith, 1994. "Economics in the Laboratory," Journal of Economic Perspectives, American Economic Association, vol. 8(1), pages 113-131, Winter.
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