Increasing Income Inequality, External Habits, and Self-Reported Happiness

13 Pages Posted: 12 Jan 2007  

Karen E. Dynan

Harvard University; Peterson Institute for International Economics

Enrichetta Ravina

Columbia Business School - Finance and Economics

Abstract

In this short paper we take a first look at the question of whether the increasing income inequality that the US has witnessed in the past 25 years has generated increasing unhappiness in those who have been falling behind, despite their real income has risen markedly. If an individual's utility depends not only on the level of her own consumption but also on how that level compares with the consumption of others, then the observed widening of the income distribution may have implications for the happiness of different groups that go beyond those associated with the changes in their respective incomes. We find that people's happiness appears to depend positively on how well their socio-economic group is doing relative to the average in their geographic area, even after controlling for the level of their own income. In addition, we find some evidence that the relationship is much stronger for people whose group has above-average income than for people whose group has below-average income; it would thus appear that relative concerns do not become an issue until a person has attained a certain place within the income distribution.

Keywords: Inequality, Happiness, Habit Formation

JEL Classification: D1, E60, J30

Suggested Citation

Dynan, Karen E. and Ravina, Enrichetta, Increasing Income Inequality, External Habits, and Self-Reported Happiness. American Economic Review, 2007. Available at SSRN: https://ssrn.com/abstract=956621

Karen E. Dynan

Harvard University ( email )

Littauer Center
Cambridge, MA 02138
United States

Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

HOME PAGE: http://https://piie.com/experts/senior-research-staff/karen-dynan

Enrichetta Ravina (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

HOME PAGE: http://www0.gsb.columbia.edu/faculty/eravina/research.html

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