Adaptation and Loss Aversion in the Relationship Between GDP and Subjective Well-Being

Hovi Matti () and Laamanen Jani-Petri ()
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Hovi Matti: Faculty of Management and Business, Tampere University, FI-33014 Tampere, Finland
Laamanen Jani-Petri: Faculty of Management and Business, Tampere University, FI-33014 Tampere, Finland

The B.E. Journal of Economic Analysis & Policy, 2021, vol. 21, issue 3, 863-895

Abstract: We examine the roles of macro-level adaptation — including social comparison effects becoming more important over time — and macroeconomic loss aversion in the time-series relationship between national income and subjective well-being. Models allowing for these phenomena are applied to cross-country panel data. We find evidence for macroeconomic loss aversion that becomes more important over time: the effects of economic growth become small and statistically insignificant in the long run, whereas the effects of contractions are large and long-lasting. The results are consistent with the Easterlin paradox and point to it being explained by macro-level adaptation to economic growth. Our results highlight the importance of allowing for both dynamics to distinguish long-run from short-run effects and asymmetries to recognize the important effects of contractions. Failing to do the former leads to a misleading impression of the long-run relationship between economic growth and well-being.

Keywords: subjective well-being; life satisfaction; adaptation; loss aversion; GDP (search for similar items in EconPapers)
JEL-codes: I31 O11 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1515/bejeap-2020-0204

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