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Journal of Economic Literature: Vol. 46 No. 1 (March 2008)

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

Article Citation

Clark, Andrew E., Paul Frijters, and Michael A. Shields. 2008. "Relative Income, Happiness, and Utility: An Explanation for the Easterlin Paradox and Other Puzzles." Journal of Economic Literature, 46(1): 95-144.

DOI: 10.1257/jel.46.1.95

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.

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Authors

Clark, Andrew E. (Paris School of Economics and IZA)
Frijters, Paul (Queensland U Technology)
Shields, Michael A. (U Melbourne)

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I31: General Welfare


Journal of Economic Literature


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