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Personality, well-being and the marginal utility of income: What can we learn from random coefficient models?

  • Schurer, Stefanie
  • Yong, Jongsay

Fixed effects models are the gold standard in empirical well-being research, however, their applicability is limited to controlling for intercept heterogeneity and identifying effects of time-varying variables. This paper investigates the usefulness of random coefficient models in controlling for heterogeneity in well-being and the marginal utility of income, and explores whether these forms of heterogeneity depend on the Big-Five personality traits. Using unique Australian longitudinal data that have personality measures available in two time periods we show that a Mundlak-adjusted random coefficient model yields almost identical results as the fixed effects model, making it a powerful modelling alternative when interest lies in multiple forms of heterogeneity. Big-Five personality explains 10 percent of the variation in intercept heterogeneity and 6-7 percent of the variation in the marginal utility of income. For women, we suggest that the marginal utility of income is significantly linked to personality, implying important gender-differences in the expected effectiveness of financial incentives to influence behaviour.

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File URL: http://researcharchive.vuw.ac.nz/handle/10063/2040
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Paper provided by Victoria University of Wellington, School of Economics and Finance in its series Working Paper Series with number 2040.

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Date of creation: 2012
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Handle: RePEc:vuw:vuwecf:2040
Contact details of provider: Postal: Alice Fong, Administrator, School of Economics and Finance, Victoria Business School, Victoria University of Wellington, PO Box 600 Wellington, New Zealand
Phone: +64 (4) 463-5353
Fax: +64 (4) 463-5014
Web page: http://www.victoria.ac.nz/sef
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  1. Mathilde Almlund & Angela Lee Duckworth & James J. Heckman & Tim D. Kautz, 2011. "Personality Psychology and Economics," NBER Working Papers 16822, National Bureau of Economic Research, Inc.
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