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

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.

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Correspondence to Nattavudh Powdthavee.

Additional information

“Once people have high incomes (by current world standards), additional increases in wealth have a very small influence on subjective well-being.” Ed Diener, psychologist.

“Happiness with life appears to be increasing in the USA. The rise is so small, however, that it seems extra income is not contributing dramatically to the quality of people’s lives.” Andrew Oswald, economist.

“Those who say money can’t buy happiness don’t know where to shop.” Anonymous.

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Powdthavee, N. How much does money really matter? Estimating the causal effects of income on happiness. Empir Econ 39, 77–92 (2010). https://doi.org/10.1007/s00181-009-0295-5

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Keywords

  • Income
  • Life satisfaction
  • Instrumental variables
  • Longitudinal
  • Happiness
  • Cost-benefit analysis

JEL Classification

  • C33
  • I0