Happiness Adaptation to Income and to Status in an Individual Panel

Abstract:     
Happiness data can help in evaluating the economic importance of "behavioural" theories. Using individual panel data on up to 7,812 people living in Germany from 1984 to 2000, we illustrate the approach by estimating the size of the effect on happiness of adaptation to income and to status. We cannot reject the null hypothesis that people adapt totally to income after four years. By comparison, significant status effects remain after this time. In the short-run (current year) a one standard deviation increase in status is associated with a similar increase in happiness to an increase of 49% of a standard deviation in income. In the long run (past four years) a one standard deviation increase in status has a similar effect to an increase of 328% of a standard deviation in income. We also discuss some evidence consistent with loss aversion.

Keywords: Happiness, psychology, adaptation to income, adaptation to status

JEL Classifications: I31, D0

Working Paper Series