Relative Income, Happiness, and Utility: An Explanation for the Easterlin Paradox and Other Puzzles

Relative Income, Happiness, and Utility: An Explanation for the Easterlin Paradox and Other Puzzles Abstract The well-known Easterlin paradox points out that average happiness has remained constant over time despite sharp rises in GNP per head. At the same time, a micro literature has typically found positive correlations between individual income and individual measures of subjective well-being. This paper suggests that these two findings are consistent with the presence of relative income terms in the utility function. Income may be evaluated relative to others (social comparison) or to oneself in the past (habituation). We review the evidence on relative income from the subjective well-being literature. We also discuss the relation (or not) between happiness and utility, and discuss some nonhappiness research (behavioral, experimental, neurological) related to income comparisons. We last consider how relative income in the utility function can affect economic models of behavior in the domains of consumption, investment, economic growth, savings, taxation, labor supply, wages, and migration. Every pitifulest whipster that walks within a skin has had his head filled with the notion that he is, shall be, or by all human and divine laws ought to be, “happy.” Thomas Carlyle http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economic Literature American Economic Association

Relative Income, Happiness, and Utility: An Explanation for the Easterlin Paradox and Other Puzzles

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Publisher
American Economic Association
Copyright
Copyright © 2008 by the American Economic Association
Subject
Articles
ISSN
0022-0515
D.O.I.
10.1257/jel.46.1.95
Publisher site
See Article on Publisher Site

Abstract

Abstract The well-known Easterlin paradox points out that average happiness has remained constant over time despite sharp rises in GNP per head. At the same time, a micro literature has typically found positive correlations between individual income and individual measures of subjective well-being. This paper suggests that these two findings are consistent with the presence of relative income terms in the utility function. Income may be evaluated relative to others (social comparison) or to oneself in the past (habituation). We review the evidence on relative income from the subjective well-being literature. We also discuss the relation (or not) between happiness and utility, and discuss some nonhappiness research (behavioral, experimental, neurological) related to income comparisons. We last consider how relative income in the utility function can affect economic models of behavior in the domains of consumption, investment, economic growth, savings, taxation, labor supply, wages, and migration. Every pitifulest whipster that walks within a skin has had his head filled with the notion that he is, shall be, or by all human and divine laws ought to be, “happy.” Thomas Carlyle

Journal

Journal of Economic LiteratureAmerican Economic Association

Published: Mar 1, 2008

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