How are Income and Non-Income Factors Different in Promoting Happiness? An Answer to the Easterlin Paradox

Tian, Guoqiang and Yang, Liyan (2005): How are Income and Non-Income Factors Different in Promoting Happiness? An Answer to the Easterlin Paradox.

Abstract

This paper develops a formal economic theory to explain the Easterlin paradox-average happiness levels do not necessarily increase as countries grow wealthier. The theory analyzes the different roles of income and non-income factors in promoting people's happiness, and provides a foundation for studying happiness from the perspectives of social welfare maximization and individuals' self-interested rationality. It is shown that, for a certain class of economies, whether Easterlin paradox appears depends on the level of non-income factors. Happiness rises with income only up to a critical point that is determined by the level of the non-income factors; but once the critical income level is achieved, raising income further will lead to Pareto ineffcient allocations and decrease people's happiness. One policy implication is that government should promote a balanced growth between income and non-income factors. The empirical analysis provides some preliminary evidence consistent with the theory's predictions.

• Item Type: MPRA Paper
• Language: English
• Keywords: Easterlin Paradox, Happiness, Social Comparison, Pareto Optimality
• Subjects: D - Microeconomics > D6 - Welfare Economics > D62 - Externalities; D - Microeconomics > D6 - Welfare Economics > D61 - Allocative Efficiency ; Cost-Benefit Analysis; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities ; Redistributive Effects ; Environmental Taxes and Subsidies

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