Untangling the Relationship Between Income and Subjective Well-Being: The Role of Perceived Income Adequacy and Borrowing Constraints

This paper aims to untangle the relationship between income and subjective well-being. To accomplish this, we investigate how subjective well-being is affected by two financially-related determinants that have not been investigated before or scarcely so. Specifically, we research the impact on subjective well-being of how people are coping with their present income as well as of their borrowing constraints. The results indicate that both variables determine subjective well-being and that they mediate the effects of other variables, namely income, which is not directly related to well-being. Additionally, they signal that income matters to the extent to which it contributes to meeting the desired consumption needs and eases borrowing constraints. Such mediating effects thus contribute to explain how income affects subjective well-being. We also inspect differences in life satisfaction responsiveness to perceived income adequacy and borrowing constraints in certain groups of individuals, and find that the subjective well-being of individuals in a more fragile financial position is particularly responsive to the alleviation of borrowing constraints. Copyright Springer Science+Business Media B.V. 2013