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Estimating the Causal Effects of Income on Happiness

  • Nattavudh Powdthavee

There is a long tradition of psychologists finding small income effects on life satisfaction (or happiness). Yet the issue of income endogeneity in life satisfaction equations has rarely been addressed. This paper aims to do just that. Instrumenting for income and allowing for unobserved heterogeneity result in an estimated income effect that is almost twice as large as the estimate in the basic specification. The results call for a reexamination on previous findings that suggest money buys little happiness, and a reevaluation on how the calculation of compensatory packages to various shocks in the individual's life events should be designed.

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Paper provided by Department of Economics, University of York in its series Discussion Papers with number 09/02.

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Date of creation: Jan 2009
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Handle: RePEc:yor:yorken:09/02
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