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A reassessment of the relationship between GDP and life satisfaction

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Proto, Eugenio and Rustichini, Aldo (2013) A reassessment of the relationship between GDP and life satisfaction. PLoS One, Volume 8 (Number 11). Article number e79358. doi:10.1371/journal.pone.0079358

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Official URL: http://dx.doi.org/10.1371/journal.pone.0079358

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Abstract

The scientific debate on the relation between Gross Domestic Product (GDP) and self reported indices of life satisfaction is still open. In a well-known finding, Easterlin reported no significant relationship between happiness and aggregate income in time-series analysis. However, life satisfaction appears to be strictly monotonically increasing with income when one studies this relation at a point in time across nations. Here, we analyze the relation between per capita GDP and life satisfaction without imposing a functional form and eliminating potentially confounding country-specific factors. We show that this relation clearly increases in country with a per capita GDP below 15,000 USD (2005 in Purchasing Power Parity), then it flattens for richer countries. The probability of reporting the highest level of life satisfaction is more than 12% lower in the poor countries with a per capita GDP below 5,600 USD than in the counties with a per capita GDP of about 15,000 USD. In countries with an income above 17,000 USD the probability of reporting the highest level of life satisfaction changes within a range of 2% maximum. Interestingly enough, life satisfaction seems to peak at around 30,000 USD and then slightly but significantly decline among the richest countries. These results suggest an explanation of the Easterlin paradox: life satisfaction increases with GDP in poor country, but this relation is approximately flat in richer countries. We explain this relation with aspiration levels. We assume that a gap between aspiration and realized income is negatively perceived; and aspirations to higher income increase with income. These facts together have a negative effect on life satisfaction, opposite to the positive direct effect of the income. The net effect is ambiguous. We predict a higher negative effect in individuals with higher sensitivity to losses (measured by their neuroticism score) and provide econometric support of this explanation.

Item Type: Journal Article
Subjects: B Philosophy. Psychology. Religion > BF Psychology
H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH): Gross domestic product , Happiness , Economics -- Psychological aspects
Journal or Publication Title: PLoS One
Publisher: Public Library of Science
ISSN: 1932-6203
Official Date: 2013
Dates:
DateEvent
2013Published
Volume: Volume 8
Number: Number 11
Page Range: Article number e79358
DOI: 10.1371/journal.pone.0079358
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Open Access
Funder: National Science Foundation (U.S.) (NSF), Economic and Social Research Council (Great Britain) (ESRC)
Grant number: SES-0924896 (NSF) ; RES-074-27-0018

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