How Happiness Adapts To Income & Status

Abstract (via Rafael Di Tella, John Haisken, Robert MacCulloch)

We study adaptation to income and to status using individual panel data on the happiness of 7,812 people living in Germany from 1984 to 2000. Specifically, we estimate a “happiness equation” defined over several lags of income and status and compare the long-run effects. We can (cannot) reject the hypothesis of no adaptation to income (status) during the four years following an income (status) change. In the short-run (current year) a one standard deviation increase in status and 52% of one standard deviation in income are associated with similar increases in happiness. In the long-run (five year average) a one standard deviation increase in status has a similar effect to an increase of 285% of a standard deviation in income. We also present different estimates of adaptation across sub-groups. For example, we find that those on the right (left) of the political spectrum adapt to status (income) but not to income (status). We can reject equal relative adaptation (to income versus status) for these two sub-groups.

Conclusion (Via Rafael Di Tella,John Haisken, Robert MacCulloch)

An important question for economists is the extent to which people adapt to changed circumstances. In order to study aspects of this question we estimate a happiness equation with a distributed lag structure for income and status on individual panel data on 7,812 people living in Germany between 1984 and 2000.
Using the full sample, we find strong adaptation to changes in income but not to changes in status. The adaptation effects to income are large in size. Once the long-run effects are estimated (by summing up the current and lagged income coefficients) we cannot reject the null hypothesis that people adapt totally to income within four years. By comparison, significant effects of status are found to remain after this time. In the short-run (first year) a one standard deviation increase in status is associated with a similar rise in happiness as an increase of 52% of a standard deviation in income. Using long-run (five year) average values of these variables, a one standard deviation increase in status is associated with a similar rise in happiness as an increase of 285% ofa standard deviation in income. Consequently these estimates (suggesting adaptation to income but not to status) display precisely the pattern required to explain the Easterlin paradox.

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31. March 2010 by Miguel Barbosa
Categories: Curated Readings, Finance & Investing | Leave a comment

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