Abstract
The perceptions of individuals regarding their own economic situation are sometimes used to measure individuals’ welfare or standard of living, thereby complementing the conventional income-based approach. While the importance of using longitudinal data when analysing the determinants of perceptions has recently been emphasized, the question of state dependence—the extent to which the past affects the present—has rarely been accounted for in the subjective economic well-being literature. The main contribution of the current paper is precisely to investigate the issue of state dependence in perceived financial difficulties. The application of an endogenous switching Markov model to data from the Luxembourg socioeconomic panel ‘Liewen zu Lëtzebuerg’ for the period 2003–2009 leads to the conclusion that there is a sizeable proportion of genuine state dependence, which confirms the importance of appropriately taking into account dynamic issues when modelling subjective variables.
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Notes
Newman et al. (2008) analysed this question by adding to their unbalanced panel attrition variables and found that attrition does not seem to be related to financial satisfaction. However, they do not provide a formal test.
To ensure that our main conclusions do not depend on this choice, we will run a robustness check using the following alternative dichotomization: individuals are considered as being in perceived financial difficulty if they report having “great difficulties”, “difficulties” or “some difficulties” and as not being in such a situation if they answer otherwise.
As mentioned earlier, two robustness checks have been carried out. First, we included the logarithm of household net income as a covariate. Second, given that the way we dichotomized our variable of interest may have an impact on our results we ran a robustness check where individuals are considered in perceived financial difficulties if they answer (1 “great difficulties” 2 “difficulties” 3 “some difficulties”) and not if they answer (4 “fairly easily” 5 “Easily” 6 “Very easily”). Results regarding the extent of state dependence and the tests of exogeneity of retention and initial conditions were similar, therefore giving us confidence in the robustness of our main results.
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Acknowledgments
This research is part of the PersiPov project supported by the Luxembourg Fonds National de la Recherche (contract C10/LM/783502) and by core funding for LISER (formerly CEPS/INSTEAD) from the Ministry of Higher Education. Comments by two editors, three referees, Francesco Andreoli, Sara Ayllón, Karina Doorley, Nizamul Islam, Jacques Silber, Philippe Van Kerm, Don Williams and participants to the 2013 IMPALLA/ESPANET conference, to the “IX Workshop in Public Policy Design: Income Dynamics and Intergenerational Mobility” (University of Girona), to the Luxembourg Workshop on Household Finance and Consumption (Banque Centrale du Luxembourg) and to a SemiLux seminar (University of Luxembourg and LISER) are gratefully acknowledged. The usual disclaimer applies.
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Fusco, A. The Dynamics of Perceived Financial Difficulties. J Happiness Stud 17, 1599–1614 (2016). https://doi.org/10.1007/s10902-015-9661-5
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DOI: https://doi.org/10.1007/s10902-015-9661-5
Keywords
- Perception dynamics
- Inertia
- State dependence
- Markov transition models
- Attrition
- Initial conditions
- Luxembourg