Income and Happiness: New Results from Generalized Threshold and Sequential Models

Abstract

Empirical studies on the relationship between income and happiness commonly use standardordered response models, the most well-known representatives being the ordered logit andthe 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, thestudy of whether the income effect depend on a person's happiness. In this paper wepinpoint the shortcomings of standard models and propose two alternatives, namelygeneralized 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 differentmarginal probability effects than standard models.

Keywords: subjective well-being, ordered response models, marginal effects

JEL Classification: C25, I31