Relative Income, Happiness and Utility: An Explanation for the Easterlin Paradox and Other Puzzles

68 Pages Posted: 5 Jul 2007

See all articles by Andrew Clark

Andrew Clark

Paris School of Economics (PSE); IZA Institute of Labor Economics

Paul Frijters

Queensland University of Technology - School of Economics and Finance

Michael A. Shields

University of Melbourne - Department of Economics; IZA Institute of Labor Economics

Date Written: June 2007

Abstract

The well-known Easterlin paradox points out that average happiness has remained constant over time despite sharp rises in GNP per head. At the same time, a micro literature has typically found positive correlations between individual income and individual measures of subjective well being. This paper suggests that these two findings are consistent with the presence of relative income terms in the utility function. Income may be evaluated relative to others (social comparison) or to oneself in the past (habituation). We review the evidence on relative income from the subjective well-being literature. We also discuss the relation (or not) between happiness and utility and discuss some non-happiness research (behavioural, experimental, neurological) dealing with income comparisons. We last consider how relative income in the utility function affects economic models of behaviour in a number of different domains.

Keywords: income, happiness, utility, comparison, habituation

JEL Classification: D01, D31, H00, I31, J28

Suggested Citation

Clark, Andrew Eric and Frijters, Paul and Shields, Michael A., Relative Income, Happiness and Utility: An Explanation for the Easterlin Paradox and Other Puzzles (June 2007). IZA Discussion Paper No. 2840. Available at SSRN: https://ssrn.com/abstract=998225

Andrew Eric Clark (Contact Author)

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

IZA Institute of Labor Economics

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

Paul Frijters

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia
(07) 3864 9364 (Phone)
(07) 3864 1500 (Fax)

HOME PAGE: http://www.bus.qut.edu.au/paulfrijters/index.jsp

Michael A. Shields

University of Melbourne - Department of Economics ( email )

Victoria 3010, 3010
Australia
+61 3 8344 4656 (Phone)
+61 3 8344 6899 (Fax)

IZA Institute of Labor Economics

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

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