Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit company supported by Deutsche Post World Net. The center is associated with the University of Bonn and offers a stimulating research environment through its research networks, research support, and visitors and doctoral programs. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. Terms of use: Documents in D I S C U S S I O N P A P E R S E R I E SIZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. ABSTRACT Relative Income, Happiness and Utility: An Explanation for the Easterlin Paradox and Other PuzzlesThe 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 non-happiness research (behavioural, experimental, neurological) dealing with income comparisons. We last consider how relative income in the utility function affects economic models of behaviour in a number of different domains. JEL Classification:D01, D31, H00, I31, J28

Psychologists and sociologists usually interpret happiness scores as cardinal and comparable across respondents, and thus run OLS regressions on happiness and changes in happiness. Economists usually assume only ordinality and have mainly used ordered latent response models, thereby not taking satisfactory account of fixed individual traits. We address this problem by developing a conditional estimator for the fixed-effect ordered logit model. We find that assuming ordinality or cardinality of happiness scores makes little difference, whilst allowing for fixed-effects does change results substantially. We call for more research into the determinants of the personality traits making up these fixed-effects.The empirical economic literature on self-reported happiness, also termed life satisfaction, seems to be taking off. Whereas in the 1970s and 1980s there was only a trickle of articles on happiness, 1 the last couple of years witnessed a spate of empirical studies on this subject. 2,3 Next to the economic literature, there are more than 3000 studies done in the last 30 years by psychologists and sociologists (Veenhoven, 1994;Veenhoven, 1997). This means that there is now a large combined literature on what causes happiness.In this paper, we investigate the robustness of all these findings. To this extent, we categorise the empirical studies on methodologies used that reflect the assumptions imposed on the meaning of satisfaction questions and on the influence of unobservables.On the meaning of satisfaction questions, psychologists have by and large interpreted the answers as cardinal, i.e. that the difference in happiness between a 4 and a 5 for any individual is the same as between an 8 and a 9 for any other individual. In the economic profession, cardinality is still considered very suspect (Ng, 1997). In studies of individual happiness therefore, we find that economic papers generally assume that satisfaction answers are only ordinally comparable, i.e. that it is unknown what the relative difference between satisfaction answers is but that all individuals do share the same interpretation of each possible answer.

Subjective Well-Being has increasingly been studied by several economists. This paper fits in that literature but takes into account that there are different aspects of life such as health, financial situation, and job. We call them domains. In this paper, we consider Subjective Well-Being as a composite of various domain satisfactions (DS). We postulate a two-layer model where individual Subjective Well-Being is explained by individual subjective domain satisfactions with respect to job, finance, health, leisure, housing, and environment. We distinguish between long-term and short-term effects. Next, we explain domain satisfactions and Subjective Well-Being by objectively measurable variables such as income. We estimate a model for the GS and DS equations with individual random effects and fix time effects.

One of the most prominent political and economic events of recent decades was the falling of the Berlin Wall on November 9, 1989, which was quickly followed by the reunification of the formerly separate entities of East and West Germany. It is well acknowledged that the falling of the wall was widely unanticipated in Germany (Stefan Bach and Harold Trabold, 2000), and thus it provides some useful exogenous variation with which we can more firmly establish causality in empirical analyses. In this paper, we aim to contribute to the growing economics literature on the determinants of life satisfaction (or happiness) by investigating how life satisfaction in East Germany changed over the decade following reunification. 1 We are particularly interested in identifying the contribution that the substantial increase in real household income in East Germany in the post-reunification years (i.e., around 60 percent between 1990 and 2001) made to reported levels of life satisfaction.In order to achieve this aim, we apply a new conditional fixed-effect ordinal estimator to our measure of life satisfaction using data from the German Socio-Economic Panel (GSOEP). The estimates from this new model are then decomposed, using a new causal technique, in order to identify the factors that drove average changes in life satisfaction in East Germany following reunification. Our methodology exploits the fact that the GSOEP is an evolving panel, allowing us to make a distinction among changes in variables affecting everyone, changes in the aggregate unobserved fixed individual characteristics of the panel due to new entrants (who are also mostly younger cohorts), and panel attrition.In Section I, we briefly review the literature and describe our data. In Section II, we present the fixed-effect methodology and the causal decomposition approach that we adopt. Section III presents the results. Finally, Section IV concludes.

a b s t r a c tIn this paper, we address the puzzle of the relationship between age and happiness. Whilst the majority of psychologists have concluded there is not much of a relationship at all, the economic literature has unearthed a possible U-shape relationship with the minimum level of satisfaction occurring in middle age (35-50). In this paper, we look for a U-shape in three panel data sets, the German Socioeconomic Panel (GSOEP), the British Household Panel Survey (BHPS) and the Household Income Labour Dynamics Australia (HILDA). We find that the raw data mainly supports a wave-like shape that only weakly looks U-shaped for the 20-60 age range. That weak U-shape in middle age becomes more pronounced when allowing for socio-economic variables. When we then take account of selection effects via fixed-effects, however, the dominant age-effect in all three panels is a strong happiness increase around the age of 60 followed by a major decline after 75, with the U-shape in middle age disappearing such that there is almost no change in happiness between the age of 20 and 50.

Using life satisfaction responses from Australian panel data we examine the questions of when and to what extent individuals are affected by major positive and negative life events, including changes in financial situation, marital status, death of a close relative, and being the victim of crime. The key advantage of our data is that we are able to identify these events on a quarterly basis rather than on the yearly basis used by previous studies. We find evidence that life events are not randomly distributed, that individuals anticipate major events to a large extent, and that they fully adapt to many events within 12 months. The estimates can be used to calculate monetary values needed to compensate individuals for life events. Using a new valuation methodology that incorporates these dynamic factors produces considerably smaller compensation valuations than those calculated using the standard approach.

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Subjective Well-Being has increasingly been studied by several economists. This paper fits in that literature but takes into account that there are different aspects of life such as health, financial situation, and job. We call them domains. In this paper, we consider Subjective Well-Being as a composite of various domain satisfactions (DS). We postulate a two-layer model where individual Subjective Well-Being is explained by individual subjective domain satisfactions with respect to job, finance, health, leisure, housing, and environment. We distinguish between long-term and short-term effects. Next, we explain domain satisfactions and Subjective Well-Being by objectively measurable variables such as income. We estimate a model for the GS and DS equations with individual random effects and fix time effects.