Money and Happiness: Income, Wealth and Subjective Well-Being
We examine the complex relationship between money and happiness. We find that both permanent income and wealth are better predictors of life satisfaction than current income and wealth. They matter not only in absolute terms but also in comparative terms. However, their relative impacts differ. The first exerts a comparison effect—the higher the permanent income of the reference group, the lower life satisfaction—the second exerts an information effect—the higher the permanent wealth of the reference group, the higher life satisfaction. We also show that negative transitory shocks to income reduce life satisfaction while transitory shocks to wealth have no effect. Lastly, we analyse the effects of their components and find that not all of them predict life satisfaction: permanent taxes do not matter, while only the value of permanent real estate, financial and business assets do. Finally, we use quantile regression and analyse to what extent our results vary along the well-being distribution, finding the impacts to be larger at lower levels of life satisfaction.
KeywordsPermanent income Permanent wealth Life satisfaction SOEP
JEL ClassificationI30 D60
We are grateful to Andrew Clark for useful comments and thank the editor, Filomena Maggino, and two anonymous referees for very useful suggestions. D’Ambrosio and Lepinteur gratefully acknowledge financial support from the Fonds National de la Recherche Luxembourg. Some of the ideas of this paper were discussed by D’Ambrosio and Jäntti with Joachim R. Frick in 2008 during their time at DIW Berlin and appeared in D'Ambrosio et al. (2009). Joachim is still greatly missed. This work was funded by Fonds National de la Recherche Luxembourg (Grant Nos. FNR/P11/05 & FNR/P11/05BIS & FNR/P12/06).
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