Income and Happiness: New Results from Generalized Threshold and Sequential Models
University of Lucerne
University of Zurich - Statistics and Empirical Economic Research; Institute for the Study of Labor (IZA); Centre for Economic Policy Research (CEPR)
IZA Discussion Paper No. 1175
Empirical studies on the relationship between income and happiness commonly use standard ordered response models, the most well-known representatives being the ordered logit and the ordered probit. However, these models restrict the marginal probability effects by design, and therefore limit the analysis of distributional aspects of a change in income, that is, the study of whether the income effect depend on a person's happiness. In this paper we pinpoint the shortcomings of standard models and propose two alternatives, namely generalized threshold and sequential models. With data of two waves of the German Socio-Economic Panel, 1984 and 1997, we show that the more general models yield different marginal probability effects than standard models.
Number of Pages in PDF File: 32
Keywords: ordered response models, marginal effects, subjective well-being
JEL Classification: C25, I31working papers series
Date posted: July 6, 2004
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