A critique of the econometrics of happiness: Are we underestimating the returns to education and income?

A large "happiness", or life satisfaction, literature in economics makes use of Likert-like scales in assessing survey respondents' cognitive evaluations of their lives. These measures are being used to estimate economic benefits in every empirical field of economics. Typically, analysis of these data have shown remarkably low direct returns of education for improving subjective well-being. In addition, arguably, the inferred impact of material wealth and income using this method is also unexpectedly low as compared with other, social factors, and as compared with economists' prior expectations which underlie, in some sense, support for using GDP as a proxy for more general quality of life goals. Discrete response scales used ubiquitously for the reporting of life satisfaction pose cognitive challenges to survey respondents, so differing cognitive abilities result in different uses of the scale, and thus potential bias in statistical inference. This problem has so far gone unnoticed. An overlooked feature of the distribution of responses to life satisfaction questions is that they exhibit certain enhancements at focal values, in particular at 0, 5, and 10 on the eleven-point scale. In this paper, I investigate the reasons for, and implications of, these response patterns. I use a model to account for the focal-value behavior using a latent variable approach to capture the "internal" cognitive evaluation before it is translated to the discrete scale of a survey question. This approach, supported by other more heuristic ones, finds a significant upward correction for the effects of both education and income on life satisfaction

Veblen goods and neighbourhoods: endogenising consumption reference groups

One of the significant developments in the last four decades of economics is the growing empirical evidence that individual consumption preferences, as mea- sured by self-reported life satisfaction, are neither fixed nor self-centred but are instead overwhelmingly dominated by externalities, partly in the form of reference levels set by others and by one’s own experience. Welfare analysis recognising this fact is likely to indicate enormous revisions for macroeconomic policy and social objectives as well as for what is taught in economics at all levels. Yet the task of constructing general equilibrium models based on this microeconomic re- ality is still in its infancy. In this work I take the conventional stance that decision makers understand their own utility function. Therefore, they can choose the mi- lieu in which they immerse themselves with the sophisticated understanding that it will affect their own consumption reference levels and therefore the degree of satisfaction they derive from their private consumption. At the same time, their private consumption will help to set the reference level for others in their chosen group. I treat theoretically the problem of such endogenous formation of consump- tion reference groups in the context of a simultaneous choice of neighbourhoods and home consumption amongst a heterogenous population. For both discrete and continuous distributions of types, I find general equilibrium outcomes in which differentiation of neighbourhoods occurs endogenously and I compare the welfare implications of growth in such economies.reference income; veblen goods; consumption reference groups; club goods

Veblen goods and neighbourhoods: endogenising consumption reference groups

One of the significant developments in the last four decades of economics is the growing empirical evidence that individual consumption preferences, as mea- sured by self-reported life satisfaction, are neither fixed nor self-centred but are instead overwhelmingly dominated by externalities, partly in the form of reference levels set by others and by one’s own experience. Welfare analysis recognising this fact is likely to indicate enormous revisions for macroeconomic policy and social objectives as well as for what is taught in economics at all levels. Yet the task of constructing general equilibrium models based on this microeconomic re- ality is still in its infancy. In this work I take the conventional stance that decision makers understand their own utility function. Therefore, they can choose the mi- lieu in which they immerse themselves with the sophisticated understanding that it will affect their own consumption reference levels and therefore the degree of satisfaction they derive from their private consumption. At the same time, their private consumption will help to set the reference level for others in their chosen group. I treat theoretically the problem of such endogenous formation of consump- tion reference groups in the context of a simultaneous choice of neighbourhoods and home consumption amongst a heterogenous population. For both discrete and continuous distributions of types, I find general equilibrium outcomes in which differentiation of neighbourhoods occurs endogenously and I compare the welfare implications of growth in such economies

Veblen goods and neighbourhoods: endogenising consumption reference groups

One of the significant developments in the last four decades of economics is the growing empirical evidence that individual consumption preferences, as mea- sured by self-reported life satisfaction, are neither fixed nor self-centred but are instead overwhelmingly dominated by externalities, partly in the form of reference levels set by others and by one’s own experience. Welfare analysis recognising this fact is likely to indicate enormous revisions for macroeconomic policy and social objectives as well as for what is taught in economics at all levels. Yet the task of constructing general equilibrium models based on this microeconomic re- ality is still in its infancy. In this work I take the conventional stance that decision makers understand their own utility function. Therefore, they can choose the mi- lieu in which they immerse themselves with the sophisticated understanding that it will affect their own consumption reference levels and therefore the degree of satisfaction they derive from their private consumption. At the same time, their private consumption will help to set the reference level for others in their chosen group. I treat theoretically the problem of such endogenous formation of consump- tion reference groups in the context of a simultaneous choice of neighbourhoods and home consumption amongst a heterogenous population. For both discrete and continuous distributions of types, I find general equilibrium outcomes in which differentiation of neighbourhoods occurs endogenously and I compare the welfare implications of growth in such economies

Weather as a transient influence on survey-reported satisfaction with life

Local weather conditions experienced by survey respondents on the day of the interview are used to assess the size of any bias resulting from transient affective influences on subjective response data and to test the validity of statistical inference about the determinants of subjective well-being

Weather as a transient influence on survey-reported satisfaction with life

Local weather conditions experienced by survey respondents on the day of the interview are used to assess the size of any bias resulting from transient affective influences on subjective response data and to test the validity of statistical inference about the determinants of subjective well-being

Empathy and Emulation: Life Satisfaction and the Urban Geography of Comparison Groups

Departures from self-centred, consumption-oriented decision making are increasingly common in economic theory and are well motivated by a wide range of behavioural data from experiments, surveys, and econometric inference. A number of studies have shown large negative externalities in individual subjective well-being due to neighbours' incomes. These reflect the role of nearby households as comparison groups acting in individuals' reference-dependent preferences over income or consumption. At the same time, there are many reasons to expect positive spillovers from having prosperous neighbours. We combine high-resolution geographic data from three Canada-wide social surveys and the 2001 census to disentangle the spatial pattern of reference groups in urban areas and to identify channels of positive and negative spillovers on life satisfaction. We find evidence of significant effects of others' income at different scales and are able to reject a number of alternative explanations for the findings.

Measuring and Understanding Subjective Well-Being

Increasing attention is being paid in academic, policy, and public arenas to subjective measures of well-being. This promising trend represents a shift towards measuring positive outcomes in psychology and greater realism in the study of economic behaviour. After a general review of past and potential uses for subjective well-being data, and a discussion of why some economists have previously been sceptical of SWB data, we present global and Canadian examples from our own research to illustrate what can be learned. Differences in subjective well-being will be shown to be large and sustained across individuals, communities, provinces and nations. Although the patterns of subjective well-being are very different across Canada than across the world, we show that in both cases the differences can be fairly well accounted for by the same set of life circumstances. Our examples of policy-relevant research findings include new accountings of the differences in individual-level SWB assessments around the world and across Canada. These highlight the importance of social factors whose role has otherwise been hard to quantify in income-equivalent terms.

International evidence on the social context of well-being

This paper uses the first three waves of the Gallup World Poll to investigate differences across countries, cultures and regions in the factors linked to life satisfaction, paying special attention to the social context. Our principal findings are: First, using the larger pooled sample, we find that answers to the satisfaction with life and Cantril ladder questions provide consistent views of what constitutes a good life, with an average of the two measures providing a clearer picture than either measure on its own. Second, we find strong evidence for the importance of both income and social context variables in explaining within-country and international differences in well-being. For most specifications tested, the combined effects of a few measures of the social and institutional context are as large as those of income in explaining both international and intra-national differences in life satisfaction. Third, the very significant influences of both income and social factors permit the calculation of compensating differentials for social factors. We find very large income-equivalent values for key measures of the social context. Fourth, the international similarity of the estimated equations suggests that the large international differences in average life evaluations are not due to different approaches to the meaning of a good life, but to differing social, institutional, and economic life circumstances

International Evidence on the Social Context of Well-Being

This paper uses the first three waves of the Gallup World Poll to investigate differences across countries, cultures and regions in the factors linked to life satisfaction, paying special attention to the social context. Our principal findings are: First, using the larger pooled sample, we find that answers to the satisfaction with life and Cantril ladder questions provide consistent views of what constitutes a good life, with an average of the two measures providing a clearer picture than either measure on its own. Second, we find strong evidence for the importance of both income and social context variables in explaining within-country and international differences in well-being. For most specifications tested, the combined effects of a few measures of the social and institutional context are as large as those of income in explaining both international and intra-national differences in life satisfaction. Third, the very significant influences of both income and social factors permit the calculation of compensating differentials for social factors. We find very large income-equivalent values for key measures of the social context. Fourth, the international similarity of the estimated equations suggests that the large international differences in average life evaluations are not due to different approaches to the meaning of a good life, but to differing social, institutional, and economic life circumstances.