Nominal or Real? The Impact of Regional Price Levels on Satisfaction with Life

25 Pages Posted: 19 Aug 2013

See all articles by Thomas Deckers

Thomas Deckers

University of Bonn

Armin Falk

University of Bonn - Economic Science Area; briq - Institute on Behavior & Inequality

Hannah Schildberg-Hörisch

Heinrich-Heine-Universität Düsseldorf; IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2013

Abstract

We study the effect of real versus nominal income on life satisfaction. According to economic theory, real income, i.e., nominal income adjusted for purchasing power, should be the relevant source of life satisfaction. Previous work, however, has only studied the impact of nominal income. We use a novel data set comprising about 7 million data points that are used to construct a price level for each of the about 400 administrative districts in Germany. We estimate a fixed effects model that controls for individual and local heterogeneity other than the price level. Our results show that higher price levels significantly reduce life satisfaction for individuals in the four lowest deciles of the income distribution. Furthermore, our findings suggest that people do not perceive money as neutral: the loss in life satisfaction caused by a higher price level is much larger than the loss in life satisfaction induced by a corresponding decrease in nominal income. Our results provide an argument in favor of regional indexation of government transfer payments such as social welfare benefits.

Keywords: life satisfaction, price index, neutrality of money, redistribution

JEL Classification: D60, C23, D31

Suggested Citation

Deckers, Thomas and Falk, Armin and Schildberg-Hörisch, Hannah, Nominal or Real? The Impact of Regional Price Levels on Satisfaction with Life (June 1, 2013). SOEP Paper No. 560, Available at SSRN: https://ssrn.com/abstract=2277903 or http://dx.doi.org/10.2139/ssrn.2277903

Thomas Deckers (Contact Author)

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

Armin Falk

University of Bonn - Economic Science Area ( email )

briq - Institute on Behavior & Inequality

Schaumburg-Lippe-Straße 5-9
Bonn, 53113
Germany

HOME PAGE: http://www.briq-institute.org/

Hannah Schildberg-Hörisch

Heinrich-Heine-Universität Düsseldorf ( email )

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

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