We show that personality traits mediate the effect of income on Life
Satisfaction. The effect is strong in the case of Neuroticism, which measures the
sensitivity to threat and punishment, in both the British Household Panel Survey
and the German Socioeconomic Panel. Neuroticism increases the usually observed
concavity of the relationship: Individuals with higher Neuroticism score enjoy income
more than those with lower score if they are poorer and enjoy income less if they are
richer. When the interaction between income and neuroticism is introduced, income
does not have significant effect on his own.
To interpret the results, we present a simple model where we assume that (i) Life
Satisfaction is dependent from the gap between aspired and realized income, and this
is modulated by Neuroticism and (ii) income increases in aspirations with a slope
less than unity, so that the gap between aspired and realized income increase with
aspirations. From the estimation of this model we argue that poorer tend to overshoot
in their aspiration, while rich tend to under-shoot. The estimation of the model
also shows substantial effect of traits on income