How are Income and Non-Income Factors Different in Promoting Happiness? An Answer to the Easterlin Paradox

Guoqiang Tian and Liyan Yang

MPRA Paper from University Library of Munich, Germany

Abstract: This paper develops a formal economic theory to explain the Easterlin paradox-average happiness levels do not necessarily increase as countries grow wealthier. The theory analyzes the different roles of income and non-income factors in promoting people's happiness, and provides a foundation for studying happiness from the perspectives of social welfare maximization and individuals' self-interested rationality. It is shown that, for a certain class of economies, whether Easterlin paradox appears depends on the level of non-income factors. Happiness rises with income only up to a critical point that is determined by the level of the non-income factors; but once the critical income level is achieved, raising income further will lead to Pareto ineffcient allocations and decrease people's happiness. One policy implication is that government should promote a balanced growth between income and non-income factors. The empirical analysis provides some preliminary evidence consistent with the theory's predictions.

Keywords: Easterlin Paradox; Happiness; Social Comparison; Pareto Optimality (search for similar items in EconPapers)
JEL-codes: D61 D62 H23 (search for similar items in EconPapers)
Date: 2005-12, Revised 2010-03
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:41209

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