Handbook on the Economics of Happiness
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Handbook on the Economics of Happiness

Edited by Luigino Bruni and Pier Luigi Porta

This book is a welcome consolidation and extension of the recent expanding debates on happiness and economics. Happiness and economics, as a new field for research, is now of pivotal interest particularly to welfare economists and psychologists. This Handbook provides an unprecedented forum for discussion of the economic issues relating to happiness. It reviews the more recent literature and offers the interested reader an insight into the vast scope of the field in terms of the theory, its applications and also experimental design. The Handbook also gives substantial indications as to the future direction of research in the field, with particular regard to policy applications and developing an economics of interpersonal relations which includes reciprocity and social interaction theory.
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Chapter 10: Experienced Versus Decision Utility of Income: Relative or Absolute Happiness

Maarten Vendrik and Johannes Hirata


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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