| By: |
Andrew E. Clark (Paris School of Economics and IZA);
Paul Frijters (Queensland University of Technology);
Michael Shields (University of Melbourne and IZA) |
| 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 non-happiness research (behavioural, experimental, neurological) dealing
with income comparisons. We last consider how relative income in the utility
function affects economic models of behaviour in a number of different domains. |
| Keywords: |
income, happiness, utility, comparison, habituation |
| JEL: |
D01 D31 H00 I31 J28 |
| Date: |
2007–06 |
| URL: |
http://d.repec.org/n?u=RePEc:iza:izadps:dp2840&r=neu |