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Edited by Luigino Bruni and Pier Luigi Porta
Chapter 10: Experienced Versus Decision Utility of Income: Relative or Absolute Happiness
Maarten Vendrik and Johannes Hirata* 1. Introduction A central ﬁnding in happiness research is low correlations between income and happiness. This is remarkable since most people seem to attach a high value to a rise in their income, as indicated by their behaviour (for example, labour supply) and stated preferences (see, for example, Frank 1999 and Easterlin 2001). This ‘classical’ paradox manifests itself on at least three levels. First, in most developed nations, average happiness has not or only slightly increased in the last half-century despite economic growth. Second, cross-sections of average happiness levels across developed countries reveal weak or zero income eﬀects on happiness (for example, Frey and Stutzer 2002). Finally, in cross-sections of individual happiness levels within a given developed country, income–happiness correlations and eﬀects turn out to be small in comparison with those for other determinants of happiness, especially over the top 75 per cent of a country’s income distribution (see, for example, Diener et al. 1993; Frey and Stutzer 2002). The ﬁrst (time-series) version of the paradox has been explained by Easterlin (1974, 2001) and Frank (1997) in terms of rising aspirations and positional externalities. The second version of the paradox, the absence of a substantial income eﬀect on happiness for cross-sections of developed countries, can be explained in a similar way, but the third version for crosssections of individuals has received little systematic attention in the literature (see Frey and Stutzer (2002) for a discussion of the role of relative income...
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