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Clark, Andrew E.,
Paul Frijters, and
Michael A. Shields. 2008. "Relative Income, Happiness, and Utility: An Explanation for the Easterlin Paradox and Other Puzzles."
,
46(1): 95-144.
Show Article Details
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.
Authors:
Clark, Andrew E. (Paris School of Economics and IZA)
Frijters, Paul (Queensland U Technology)
Shields, Michael A. (U Melbourne)
JEL Classifications:
I31: General Welfare
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