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Life-Satisfaction in Urban Ethiopia: The Role of Relative Poverty and Unobserved Heterogeneity

  • Alem, Yonas

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 impactof 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 Resources For the Future in its series Discussion Papers with number dp-14-04-efd.

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Date of creation: 05 Mar 2014
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Handle: RePEc:rff:dpaper:dp-14-04-efd
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  1. Yonas Alem & Gunnar Köhlin, 2014. "The Impact of Food Price Inflation on Subjective Well-being: Evidence From Urban Ethiopia," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 116(3), pages 853-868, May.
  2. 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.
  3. 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).
  4. Andrew E. Clark & Claudia Senik, 2010. "Who compares to whom? The anatomy of income comparisons in Europe," PSE - Labex "OSE-Ouvrir la Science Economique" halshs-00754447, HAL.
  5. Erzo F.P. Luttmer, 2004. "Neighbors as Negatives: Relative Earnings and Well-Being," NBER Working Papers 10667, National Bureau of Economic Research, Inc.
  6. AndrewE. Clark & Nicolai Kristensen & Niels Westergård-Nielsen, 2009. "Job Satisfaction and Co-worker Wages: Status or Signal?," Economic Journal, Royal Economic Society, vol. 119(536), pages 430-447, 03.
  7. Clark, Andrew E. & Kristensen, Nicolai & Westergaard-Nielsen, Niels, 2008. "Economic Satisfaction and Income Rank in Small Neighbourhoods," Working Papers 08-25, University of Aarhus, Aarhus School of Business, Department of Economics.
  8. Alem, Yonas & Colmer, Jonathan, 2014. "Optimal Expectations and the Welfare Cost of Climate Variability," Discussion Papers dp-14-03-efd, Resources For the Future.
  9. 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.
  10. Geeta Kingdon & John Knight, 2004. "Community, Comparisons and Subjective Well-being in a Divided Society," Development and Comp Systems 0409067, EconWPA.
  11. David G. Blanchflower & Andrew J. Oswald, 2004. "Money, Sex and Happiness: An Empirical Study," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(3), pages 393-415, October.
  12. 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.
  13. 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.
  14. McBride, Michael, 2001. "Relative-income effects on subjective well-being in the cross-section," Journal of Economic Behavior & Organization, Elsevier, vol. 45(3), pages 251-278, July.
  15. 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.
  16. 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.
  17. Ravallion, Martin & Lokshin, Michael, 2005. "Who cares about relative deprivation ?," Policy Research Working Paper Series 3782, The World Bank.
  18. Nick Carroll & Paul Frijters & Michael Shields, 2009. "Quantifying the costs of drought: new evidence from life satisfaction data," Journal of Population Economics, Springer;European Society for Population Economics, vol. 22(2), pages 445-461, April.
  19. 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.
  20. Carol Graham & Andrew Felton, 2006. "Inequality and happiness: Insights from Latin America," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 4(1), pages 107-122, April.
  21. 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.
  22. 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.
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