IDEAS home Printed from https://ideas.repec.org/p/zbw/cegedp/171.html
   My bibliography  Save this paper

Preferences, income, and life satisfaction: An equivalence result

Author

Listed:
  • Strulik, Holger

Abstract

In this paper I investigate the nexus between life time utility (life satisfaction) and income predicted by the standard model of endogenous economic growth under different behavioral assumptions. The solution rationalizes why the empirical association between income and life satisfaction is approximately log-linear. I show that the solution is observationally equivalent when individuals compare their consumption (i) with others, (ii) with their own past consumption achievements, and (iii) not at all (ordinary preferences). This finding suggests that the observed slope of the income - life satisfaction curve is uninformative about human behavior driven by referencedependent utility. In particular, the hypothesis that the flattening of the life satisfaction curve at high income levels indicates that people are comparing their consumption too much with others or own past achievements is not supported by the workhorse model of endogenous economic growth.

Suggested Citation

  • Strulik, Holger, 2013. "Preferences, income, and life satisfaction: An equivalence result," Center for European, Governance and Economic Development Research Discussion Papers 171, University of Goettingen, Department of Economics.
  • Handle: RePEc:zbw:cegedp:171
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/80431/1/76625495X.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Betsey Stevenson & Justin Wolfers, 2013. "Subjective Well-Being and Income: Is There Any Evidence of Satiation?," American Economic Review, American Economic Association, vol. 103(3), pages 598-604, May.
    2. Alonso-Carrera, Jaime & Caballe, Jordi & Raurich, Xavier, 2005. "Growth, habit formation, and catching-up with the Joneses," European Economic Review, Elsevier, vol. 49(6), pages 1665-1691, August.
    3. Oswald, Andrew J., 2008. "On the curvature of the reporting function from objective reality to subjective feelings," Economics Letters, Elsevier, vol. 100(3), pages 369-372, September.
    4. Abel, Andrew B, 1990. "Asset Prices under Habit Formation and Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 80(2), pages 38-42, May.
    5. Robert C. Feenstra & Robert Inklaar & Marcel P. Timmer, 2015. "The Next Generation of the Penn World Table," American Economic Review, American Economic Association, vol. 105(10), pages 3150-3182, October.
    6. Andrew E. Clark & Paul Frijters & Michael A. Shields, 2008. "Relative Income, Happiness, and Utility: An Explanation for the Easterlin Paradox and Other Puzzles," Journal of Economic Literature, American Economic Association, vol. 46(1), pages 95-144, March.
    7. Angus Deaton, 2008. "Income, Health, and Well-Being around the World: Evidence from the Gallup World Poll," Journal of Economic Perspectives, American Economic Association, vol. 22(2), pages 53-72, Spring.
    8. Francisco Alvarez-Cuadrado & Goncalo Monteiro & Stephen J. Turnovsky, 2004. "Habit Formation, Catching Up with the Joneses, and Economic Growth," Journal of Economic Growth, Springer, vol. 9(1), pages 47-80, March.
    9. Di Tella, Rafael & Haisken-De New, John & MacCulloch, Robert, 2010. "Happiness adaptation to income and to status in an individual panel," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 834-852, December.
    10. Betsey Stevenson & Justin Wolfers, 2008. "Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox," CESifo Working Paper Series 2394, CESifo.
    11. Koichi Kawamoto, 2009. "Status-seeking behavior, the evolution of income inequality, and growth," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 39(2), pages 269-289, May.
    12. Cooper, Ben & Garcia-Penalosa, Cecilia & Funk, Peter, 2001. "Status Effects and Negative Utility Growth," Economic Journal, Royal Economic Society, vol. 111(473), pages 642-665, July.
    13. Jody Overland & Christopher D. Carroll & David N. Weil, 2000. "Saving and Growth with Habit Formation," American Economic Review, American Economic Association, vol. 90(3), pages 341-355, June.
    14. Strulik, Holger, 2008. "Comparing Consumption: A Curse or a Blessing?," Hannover Economic Papers (HEP) dp-382, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    15. Raj Chetty, 2006. "A New Method of Estimating Risk Aversion," American Economic Review, American Economic Association, vol. 96(5), pages 1821-1834, December.
    16. Ben R. Craig & William E. Jackson & James B. Thomson, 2004. "On SBA-guaranteed lending and economic growth," Working Papers (Old Series) 0403, Federal Reserve Bank of Cleveland.
    17. Layard, R. & Mayraz, G. & Nickell, S., 2008. "The marginal utility of income," Journal of Public Economics, Elsevier, vol. 92(8-9), pages 1846-1857, August.
    18. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June.
    19. Bruno S. Frey & Alois Stutzer, 2002. "What Can Economists Learn from Happiness Research?," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 402-435, June.
    20. Betsey Stevenson & Justin Wolfers, 2008. "Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(1 (Spring), pages 1-102.
    21. repec:pri:cheawb:deaton_income_health_and_wellbeing_around_the_world_evidence_%20from_gall is not listed on IDEAS
    22. Carroll, Christopher D & Overland, Jody & Weil, David N, 1997. "Comparison Utility in a Growth Model," Journal of Economic Growth, Springer, vol. 2(4), pages 339-367, December.
    23. Boldrin, Michele & Christiano, Lawrence J. & Fisher, Jonas D.M., 1997. "Habit Persistence And Asset Returns In An Exchange Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 1(2), pages 312-332, June.
    24. Alpizar, Francisco & Carlsson, Fredrik & Johansson-Stenman, Olof, 2005. "How much do we care about absolute versus relative income and consumption?," Journal of Economic Behavior & Organization, Elsevier, vol. 56(3), pages 405-421, March.
    25. Brunner, Martin & Strulik, Holger, 2002. "Solution of perfect foresight saddlepoint problems: a simple method and applications," Journal of Economic Dynamics and Control, Elsevier, vol. 26(5), pages 737-753, May.
    26. Heaton, John, 1995. "An Empirical Investigation of Asset Pricing with Temporally Dependent Preference Specifications," Econometrica, Econometric Society, vol. 63(3), pages 681-717, May.
    27. de la Croix, David, 1998. "Growth and the relativity of satisfaction," Mathematical Social Sciences, Elsevier, vol. 36(2), pages 105-125, September.
    28. Corneo, Giacomo & Jeanne, Olivier, 2001. " Status, the Distribution of Wealth, and Growth," Scandinavian Journal of Economics, Wiley Blackwell, vol. 103(2), pages 283-293, June.
    29. Futagami, Koichi & Shibata, Akihisa, 1998. "Keeping one step ahead of the Joneses: Status, the distribution of wealth, and long run growth," Journal of Economic Behavior & Organization, Elsevier, vol. 36(1), pages 109-126, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Holger Strulik, 2015. "How Status Concerns Can Make Us Rich and Happy," Economica, London School of Economics and Political Science, vol. 82, pages 1217-1240, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Holger Strulik, 2015. "How Status Concerns Can Make Us Rich and Happy," Economica, London School of Economics and Political Science, vol. 82, pages 1217-1240, December.
    2. Schünemann, Johannes & Trimborn, Timo, 2017. "Boosting taxes for boasting about houses: Status concerns in the housing market," ECON WPS - Working Papers in Economic Theory and Policy 05/2017, TU Wien, Institute of Statistics and Mathematical Methods in Economics, Economics Research Unit.
    3. Alvarez-Cuadrado, Francisco & Van Long, Ngo, 2011. "The relative income hypothesis," Journal of Economic Dynamics and Control, Elsevier, vol. 35(9), pages 1489-1501, September.
    4. Strulik, Holger, 2008. "Comparing Consumption: A Curse or a Blessing?," Hannover Economic Papers (HEP) dp-382, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    5. Cecilia García-Peñalosa & Stephen Turnovsky, 2008. "Consumption externalities: a representative consumer model when agents are heterogeneous," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 37(3), pages 439-467, December.
    6. Francisco Alvarez-Cuadrado & Ngo Van Long, 2008. "A Permanent Income Version of the Relative Income Hypothesis," CESifo Working Paper Series 2361, CESifo.
    7. Aronsson, Thomas & Johansson-Stenman, Olof, 2014. "Positional preferences in time and space: Optimal income taxation with dynamic social comparisons," Journal of Economic Behavior & Organization, Elsevier, vol. 101(C), pages 1-23.
    8. Lombardo, Vincenzo, 2012. "Social inclusion and the emergence of development traps," MPRA Paper 36766, University Library of Munich, Germany.
    9. Clingingsmith, David, 2016. "Negative Emotions, Income, and Welfare: Casual Estimates from the PSID," SocArXiv fae4x, Center for Open Science.
    10. Clingingsmith, David, 2017. "Negative Emotions, Income, and Welfare: Causal Estimates from the PSID," SocArXiv q2mxt, Center for Open Science.
    11. Wirl Franz & Novak Andreas J. & Hof Franz X., 2008. "Happiness due to Consumption and its Increases, Wealth and Status," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 12(4), pages 1-34, December.
    12. Clingingsmith, David, 2016. "Negative emotions, income, and welfare: Causal estimates from the PSID," Journal of Economic Behavior & Organization, Elsevier, vol. 130(C), pages 1-19.
    13. Gómez Manuel A., 2010. "Endogenous Growth, Habit Formation and Convergence Speed," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-32, January.
    14. Vincenzo Lombardo, 2012. "Social inclusion and the emergence of development traps," Discussion Papers 13_2012, CRISEI, University of Naples "Parthenope", Italy.
    15. Clément Bellet, 2017. "Essays on Inequality, Social Preferences and Consumer Behavior," Sciences Po publications info:hdl:2441/vbu6kd1s68o, Sciences Po.
    16. Proto, Eugenio & Rustichini, Aldo, 2015. "Life satisfaction, income and personality," Journal of Economic Psychology, Elsevier, vol. 48(C), pages 17-32.
    17. Layard, Richard & Mayraz, Guy & Nickell, Stephen, 2009. "Does relative income matter? Are the critics right?," LSE Research Online Documents on Economics 28594, London School of Economics and Political Science, LSE Library.
    18. Jan-Emmanuel De Neve & George Ward & Femke De Keulenaer & Bert Van Landeghem & Georgios Kavetsos & Michael I. Norton, 2018. "The Asymmetric Experience of Positive and Negative Economic Growth: Global Evidence Using Subjective Well-Being Data," The Review of Economics and Statistics, MIT Press, vol. 100(2), pages 362-375, May.
    19. Zhang, Yinjunjie & Xu, Zhicheng Phil & Palma, Marco A., 2017. "Misclassification Errors of Subjective Well-being: A New Approach to Mapping Happiness," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258553, Agricultural and Applied Economics Association.
    20. Jinan Zeidan, 2015. "Are Comparisons Luxuries? Subjective Poverty and Positional Concerns in Indonesia," AMSE Working Papers 1505, Aix-Marseille School of Economics, France.

    More about this item

    Keywords

    status; habit formation; happiness; economic growth;
    All these keywords.

    JEL classification:

    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:cegedp:171. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - Leibniz Information Centre for Economics). General contact details of provider: https://edirc.repec.org/data/cdgoede.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.