Diminishing Marginal Utility of Income? A Caveat

Richard Easterlin

No usclwps-1004, University of Southern California Legal Working Paper Series from University of Southern California Law School

Abstract: Few generalizations in the social sciences enjoy such wide-ranging support as that of diminishing marginal utility of income. Put simply, this proposition states that the effect on subjective well-being of a $1,000 increase in income becomes progressively smaller the higher the initial level of income. Distinguished scholars in economics, political science, psychology, and sociology who have made major contributions to the study of subjective well-being concur on this assertion. Its policy appeal is great because it implies that raising the income of poor people or poor countries will raise their well-being considerably, while an increase of equal amount for the rich will have comparatively little effect. The diminishing returns generalization is based on point-of-time bivariate comparisons of happiness with real income, either among or within countries. If, as these cross sectional studies suggest, there is diminishing marginal utility of income, then this point-of-time pattern should be replicated over time as income traverses the range of values covered in the cross sectional analysis. I propose to test whether historical experience reproduces the point-of-time relationship, first, using an international cross section of happiness and income, and then, a within-country one for the United States. As in the studies cited, I use a simple bivariate comparison. It turns out that income change over time does not generate the change in happiness implied by the cross sectional pattern. The present analysis is not exhaustive, but it does suggest the need for caution in assuming that cross sectional generalizations about diminishing marginal utility of income can be safely used to anticipate change over time.

New Economics Papers: this item is included in nep-law and nep-ltv
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (65)

Downloads: (external link)
http://law.bepress.com/cgi/viewcontent.cgi?article=1004&context=usclwps (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bep:usclwp:usclwps-1004

Access Statistics for this paper

More papers in University of Southern California Legal Working Paper Series from University of Southern California Law School
Bibliographic data for series maintained by Christopher F. Baum ().