Nominal or Real? The Impact of Regional Price Levels on Satisfaction with Life

Thomas Deckers (), Armin Falk and Hannah Schildberg-Hörisch ()
Additional contact information
Thomas Deckers: University of Bonn
Hannah Schildberg-Hörisch: Max Planck Institute for Research on Collective Goods

No 7345, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We study the effect of real versus nominal income on life satisfaction. According to economic theory real income, i.e., nominal income adjusted for purchasing power, should be the relevant source of life satisfaction. Previous work, however, has only studied the impact of nominal income. We use a novel data set comprising about 7 million data points that are used to construct a price level for each of the about 400 administrative districts in Germany. We estimate a fixed effects model that controls for individual and local heterogeneity other than the price level. Our results show that higher price levels significantly reduce life satisfaction for individuals in the four lowest deciles of the income distribution. Furthermore, our findings suggest that people do not perceive money as neutral: the loss in life satisfaction caused by a higher price level is much larger than the loss in life satisfaction induced by a corresponding decrease in nominal income. Our results provide an argument in favor of regional indexation of government transfer payments such as social welfare benefits.

Keywords: life satisfaction; price index; neutrality of money; redistribution (search for similar items in EconPapers)
JEL-codes: C23 D31 D60 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2013-04
New Economics Papers: this item is included in nep-hap and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published - published in: The B.E. Journal of Economic Analysis and Policy, 2016, 16, 1337–1358.

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Related works:
Journal Article: Nominal or Real? The Impact of Regional Price Levels on Satisfaction with Life (2016)
Working Paper: Nominal or Real?: The Impact of Regional Price Levels on Satisfaction with Life (2013)
Working Paper: Nominal or Real? The Impact of Regional Price Levels on Satisfaction with Life (2013)
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