Relative income, happiness, and utility: An explanation for the Easterlin paradox and other puzzles

Andrew Clark, Paul Frijters and Michael Shields

PSE-Ecole d'économie de Paris (Postprint) from HAL

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.

Date: 2008-03
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Published in Journal of Economic Literature, 2008, 46 (1), pp.94-144. ⟨10.1257/jel.46.1.95⟩

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Related works:
Journal Article: Relative Income, Happiness, and Utility: An Explanation for the Easterlin Paradox and Other Puzzles (2008)
Working Paper: Relative income, happiness, and utility: An explanation for the Easterlin paradox and other puzzles (2008)
Working Paper: Relative Income, Happiness and Utility: An Explanation for the Easterlin Paradox and Other Puzzles (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:pseptp:halshs-00754299

DOI: 10.1257/jel.46.1.95

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