Does the Risk of Poverty Reduce Happiness?

45 Pages Posted: 24 Apr 2014

See all articles by Antonio Stefano Caria

Antonio Stefano Caria

Centre for the Study of African Economies

Paolo Falco

University of Oxford - Centre of the Study of African Economies

Date Written: April 2014

Abstract

We investigate the unexplored link between the risk of poverty and happiness in the context of a developing country. Using unique longitudinal data, we estimate workers’ vulnerability to income-poverty and find a strong negative relationship between vulnerability and happiness, over and above a positive income effect. The result is robust and cannot be reduced to the effect of two-sided uncertainty. A matched behavioural experiment shows that respondents are significantly loss-averse. We conclude that downside risk is an important determinant of happiness and of economic decisions under uncertainty. Policies that mitigate downward risk may thus have direct impacts on both well-being and efficiency.

Keywords: poverty, vulnerability, risk, subjective well-being, happiness, loss-aversion

JEL Classification: D60, I31, I32, D81, O12

Suggested Citation

Caria, Antonio Stefano and Falco, Paolo, Does the Risk of Poverty Reduce Happiness? (April 2014). Centro Studi Luca d'Agliano Development Studies Working Paper No. 363. Available at SSRN: https://ssrn.com/abstract=2427756 or http://dx.doi.org/10.2139/ssrn.2427756

Antonio Stefano Caria

Centre for the Study of African Economies ( email )

Oxford OX1 3UL
United Kingdom

Paolo Falco (Contact Author)

University of Oxford - Centre of the Study of African Economies ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

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