Hedonic Adaptation to Living Standards and the Hidden Cost of Parental Income

Abstract

High parental income, while undeniably causing beneÞts for a child in terms of better access to education and more favorable labor market outcomes, may at the same time increase a childÕs income aspirations and thereby reduce Þnancial satisfaction, ceteris paribus. In this paper, we investigate the relationship between Þnancial satisfaction and parental income with data from the German Socio-Economic Panel. The results indicate that there is indeed a negative well-being externality of parental income, and that children appear to compare their actual income situation with the aspiration level acquired while growing up