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18 February, 2021

8 Min Read

Money vs. happiness

Money vs. happiness

Introduction

  • This article studies the relationships between subjective well-being, which is narrowly defined to focus on economic well-being in India, and variants of income, based on the only panel survey in India Human Development Survey (IHDS).

Are richer sections more satisfied with their lives than the poorer ones?

  • The question whether the rich are more satisfied with their lives is often taken for granted.
  • Gallup World Poll, show that the relationship between subjective well-being and income is often weak, except in low-income countries in Africa and South Asia.
  • Researcher Daniel Kahneman and his collaborators, for example, report that the correlation between household income and reported life satisfaction or happiness with life typically ranges from 0.15 to 0.30.

Reasons for poor linkage between household income and subjective well-being

  • Materialistic tendencies: Growth in income mostly has a transitory effect on individuals’ reported life satisfaction, as they adapt to material goods.
  • Relative income: Relative income, rather than the level of income, affects well-being — earning more or less than others looms larger than how much one earns.
  • Per capita income: Though average life satisfaction in countries tends to rise with GDP per capita at low levels of income, there is little increase in life satisfaction once GDP per capita exceeds $10,000 (in purchasing power parity).

Measure of wellbeing

There is a distinction between decision utility and experienced utility.

  • Decision utility: In the standard approach to measure well-being, ordinal preferences are inferred from the observations of decisions made supposedly by rational (utility maximising) agents. The object derived is decision utility.
  • Experienced utility: In contrast, recent advances in psychology, sociology, behavioural economics and happiness economics suggest that decision utility is unlikely to illuminate the utility associated with different experiences.
    • Hence the emphasis on measures that focus more directly on experienced utility, notably using subjective well-being (SWB) responses.

IHDS survey

  • We draw upon the two rounds of the IHDS for 2005 and 2012.
  • An important feature of IHDS is that it collected data on SWB.
  • The question asked was: compared to seven years ago, would you say your household is economically doing the same, better or worse today?
    • So, the focus of this SWB is narrow.
    • But as it is based on self-reports, it connotes a broader view that is influenced by several factors other than income, assets, and employment, like age, health, caste, etc.
  • There is a positive relationship between SWB and per capita expenditure (a proxy for per capita income, which is frequently underestimated and underreported): the higher the expenditure in 2005, the greater was the SWB in 2012.
  • The priority of expenditure, in time, rules out reverse causation from high SWB to high expenditure, i.e., higher well-being could also be associated with better performance resulting in higher expenditure.
  • High expenditure is associated with a decent standard of living, good schooling of children, and financial security.
  • As India’s comparable GDP per capita in 2003 (PPP) was $2,270, well below the threshold of $10,000, it is consistent with extant evidence.

Conclusion

  • The larger the proportionate increase in per capita expenditure between 2005 and 2012, the greater is the SWB.
  • To illustrate this, we construct three terciles of expenditure in 2005: the first representing extremely poor, the second the middle class, and the third the rich.
    • If the proportionate increase in per capita expenditure is highest among the extremely poor and lowest among the rich, the higher will be the SWB of the extremely poor.
  • This provides important policy insights. One is that in a lower-middle-income country like India, growth of expenditure or income is significant.

Source: TH

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