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Adaptation and Loss Aversion in the Relationship between GDP and Subjective Well-being

Matti Hovi and Jani-Petri Laamanen ()

No 1717, Working Papers from Tampere University, School of Management and Business, Economics

Abstract: We examine the roles of adaptation and loss aversion in the relationship between national income and subjective well-being. Earlier studies have found that people and nations tend to adapt to changes in income, and that well-being is more sensitive to income losses than to income gains. We apply a model which allows for both adaptation and asymmetries to cross-country panel data. We find evidence for both short-run and long-run loss aversion. Asymmetry becomes more important over time because the effects of income increases become statistically insignificant, whereas the effects of income decreases are significant and large also in the long run.

Keywords: Subjective well-being; Life satisfaction; Happiness; Adaptation; Loss aversion; Output; Income; GDP; Economic growth; Macroeconomics; Easterlin paradox (search for similar items in EconPapers)
JEL-codes: O11 I31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-hap
Date: 2017-11
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