The Marginal Utility of Income

Richard Layard, Guy Mayraz and Stephen Nickell ()

No 50, SOEPpapers from DIW Berlin, The German Socio-Economic Panel (SOEP)

Abstract: In normative public economics it is crucial to know how fast the marginal utility of income declines as income increases. One needs this parameter for cost-benefit analysis, for optimal taxation and for the (Atkinson) measurement of inequality. We estimate this parameter using four large cross-sectional surveys of subjective happiness and two panel surveys. Altogether, the data cover over 50 countries and time periods between 1972 and 2005. In each of the six very different surveys, using a number of assumptions, we are able to estimate the elasticity of marginal utility with respect to income. We obtain very similar results from each survey. The highest (absolute) value is 1.34 and the lowest is 1.19, with a combined estimate of 1.26. The results are also very similar for subgroups in the population. We also examine whether these estimates (which are based directly on the scale of reported happiness) could be biased upwards if true utility is convex with respect to reported happiness. We find some evidence of such bias, but it is small¿yielding a new estimated elasticity of 1.24 for the combined sample.

Keywords: Marginal utility; income; life satisfaction; happiness; public economic; welfare; inequality; optimal taxation; reference-dependent preferences (search for similar items in EconPapers)
JEL-codes: I31 H00 D1 D61 H21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-hap, nep-ltv, nep-pub and nep-upt
Date: 2007
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Published in: Journal of Public Economics 92 (2007) 8-9, 1846-1857

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http://www.diw.de/documents/publikationen/73/diw_01.c.63429.de/diw_sp0050.pdf (application/pdf)

Related works:
Working Paper: The Marginal Utility of Income (2007)
Journal Article: The marginal utility of income (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:diw:diwsop:diw_sp50

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