Original Paper

Empirical Economics

, Volume 39, Issue 1, pp 77-92

How much does money really matter? Estimating the causal effects of income on happiness

  • Nattavudh PowdthaveeAffiliated withDepartment of Economics and Related Studies, University of York Email author 

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Abstract

There is a long tradition of psychologists finding small income effects on life satisfaction (or happiness). Yet the issue of income endogeneity in life satisfaction equations has rarely been addressed. The present paper is an attempt to estimate the causal effect of income on happiness. Instrumenting for income and allowing for unobserved heterogeneity result in an estimated income effect that is almost twice as large as the estimate in the basic specification. The results call for a reexamination on previous findings that suggest money buys little happiness, and a reevaluation on how the calculation of compensatory packages to various shocks in the individual’s life events should be designed.

Keywords

Income Life satisfaction Instrumental variables Longitudinal Happiness Cost-benefit analysis

JEL Classification

C33 I0