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Easterlin-types and Frustrated Achievers: the Heterogeneous E¤ects of Income Changes on Life Satisfaction

We investigate the relationship between money and happiness across the waves of the British Household Panel Study by using a latent class approach which accounts for slope heterogeneity, omitted variable bias and departures from normality assumptions. Our findings reveal the presence of a vast majority of "Easterlin-type" individuals with positive but very weak relationship between changes in income and changes in happiness and a small minority (2 percent) of "frustrated achievers" with negative relationship. Such share is much below descriptive evidence on frustrated achievement (17.5 percent). The probability of belonging to such group is shown to be positively related with divorced status and negatively related to education and relative (personal to reference group) income. Our interpretation of these results is that the standard concave money-happiness relationship provides a partial and incomplete picture of the complex nexus between happiness and income as it does not take into account two important phenomena: the role of peers and of reference group income and that of the dynamics between realisations and expectations.

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Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 127.

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Length: 27 pages
Date of creation: 09 Sep 2008
Date of revision: 09 Sep 2008
Handle: RePEc:rtv:ceisrp:127
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  1. Ravallion, Martin & Lokshin, Michael, 2001. "Identifying Welfare Effects from Subjective Questions," Economica, London School of Economics and Political Science, vol. 68(271), pages 335-57, August.
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  12. Jonathan Gardner & Andrew J. Oswald, 2006. "Do divorcing couples become happier by breaking up?," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 169(2), pages 319-336.
  13. Winkelmann, Liliana & Winkelmann, Rainer, 1998. "Why Are the Unemployed So Unhappy? Evidence from Panel Data," Economica, London School of Economics and Political Science, vol. 65(257), pages 1-15, February.
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  15. Paap, Richard & Franses, Philip Hans & van Dijk, Dick, 2005. "Does Africa grow slower than Asia, Latin America and the Middle East? Evidence from a new data-based classification method," Journal of Development Economics, Elsevier, vol. 77(2), pages 553-570, August.
  16. Bloom, David E & Canning, David & Sevilla, Jaypee, 2003. " Geography and Poverty Traps," Journal of Economic Growth, Springer, vol. 8(4), pages 355-78, December.
  17. Ada Ferrer-i-Carbonell & Paul Frijters, 2004. "How Important is Methodology for the estimates of the determinants of Happiness?," Economic Journal, Royal Economic Society, vol. 114(497), pages 641-659, 07.
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  21. Brown, Gordon D. A. & Gardner, Jonathan & Oswald, Andrew J. & Qian, Jing, 2005. "Does Wage Rank Affect Employees' Wellbeing?," IZA Discussion Papers 1505, Institute for the Study of Labor (IZA).
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