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Relative income, happiness, and utility : an explanation for the Easterlin paradox and other puzzles

Clark, Andrew, Frijters, Paul, & Shields, Michael (2008) Relative income, happiness, and utility : an explanation for the Easterlin paradox and other puzzles. Journal of Economic Literature, 46(1), pp. 95-144.

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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 nonhappiness research (behavioral, experimental, neurological) related to income comparisons. We last consider how relative income in the utility function can affect economic models of behavior in the domains of consumption, investment, economic growth, savings, taxation, labor supply, wages, and migration.

Impact and interest:

462 citations in Scopus
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356 citations in Web of Science®

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ID Code: 30738
Item Type: Journal Article
Additional URLs:
Keywords: happiness, utility functions, correlation analysis, personal income, economic models
DOI: 10.1257/jel.46.1.95
ISSN: 0022-0515
Subjects: Australian and New Zealand Standard Research Classification > ECONOMICS (140000) > APPLIED ECONOMICS (140200) > Industry Economics and Industrial Organisation (140209)
Australian and New Zealand Standard Research Classification > ECONOMICS (140000) > APPLIED ECONOMICS (140200) > Public Economics- Public Choice (140213)
Australian and New Zealand Standard Research Classification > ECONOMICS (140000) > APPLIED ECONOMICS (140200) > Public Economics- Taxation and Revenue (140215)
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Current > Schools > School of Economics & Finance
Deposited On: 12 Feb 2010 22:46
Last Modified: 29 Feb 2012 23:42

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