Abstract
Since the 1970s, there has been mounting empirical evidence that after a certain point, income and happiness, or life satisfaction, are not correlated. However, despite the growing empirical evidence, the new dynamic has not been adequately modeled mathematically. To remedy this gap, in this paper, we go through the literature on the relationship between consumption, income, and happiness and provide a novel mathematical model. As we will see, our model can explain all of the empirical nuances encountered by happiness studies and also helps understand the relationship between reported life-satisfaction and other variables like inequality.
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Notes
Indeed, Wisman (2019) argues that Adam Smith had views on conspicuous consumption very similar to Thorstein Veblen. However, in the Theory of Moral Sentiment, Smith (1759) focused more broadly on ways individuals socially positioned because of the very low levels of consumption of many during Smith’s lifetime.
To be sure, Layard (2006) seems to think relative income and relative consumption are two independent variables, and thus distinguishes from a relative income and conspicuous consumption explanation of the Easterlin paradox.
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Stelzner, M. Growth, Consumption, and Happiness: Modeling the Easterlin Paradox. J Happiness Stud 23, 377–389 (2022). https://doi.org/10.1007/s10902-021-00402-4
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DOI: https://doi.org/10.1007/s10902-021-00402-4