Happiness and loss aversion: Is utility concave or convex in relative income?

A central finding in happiness research is that a person's life satisfaction depends on the level of her income relative to the average income in her social reference group. This dependence of life satisfaction on relative income can be related to the reference dependence of the value function in Kahneman and Tversky's [Kahneman, D., Tversky, A., 1979. Prospect theory: an analysis of decision under risk. Econometrica 47, 263–291] prospect theory. In this paper we investigate whether the characteristics of the value function like concavity for gains, convexity for losses, and loss aversion apply to the dependence of life satisfaction on relative income. This is tested with an improved measure for the reference income for a large German panel spanning the years 1984–2001. We find concavity of life satisfaction in positive relative income, but unexpectedly strongly significant concavity of life satisfaction in negative relative income as well. We also present a new method to show the robustness of these concavity results to extreme distortions of the reported-life-satisfaction scale. The concavity for negative relative income implies a rising marginal sensitivity of life satisfaction to more negative values of relative income, and hence loss aversion (in a wide sense). This may be explained in terms of increasing financial obstacles to social participation.     

A test of the permanent income hypothesis on Czech voucher privatization

In 1992 the Czech Republic privatized state assets, which resulted in some citizens receiving an unexpected windfall. Whether the windfall was consumed or saved provides a clear test of the permanent income hypothesis in a transitional economy. Analysis of data from a survey conducted specifically to test this hypothesis indicates that only a small number of transferred assets were consumed, a finding which is consistent with the permanent income hypothesis. JEL classification: D31, E21, H24.     

中国农村收入流动分析

本文利用农业部1986—2001年间六省农村固定观察点数据,对农村家庭收入流动进行了经验分析,发现:第一,分析期内农户呈现出收入流动程度随时间先增大后逐渐稳定的趋势,这使得持久收入不均等程度显著小于年度不均等,1995年以后虽然有较大的年度收入不均等,但持久收入不均等较小;第二,分析期内农村收入流动始终大于同期城市收入流动;第三,在1986—1990年间,农民平均收入较高省份的收入流动程度较大,而在1995—2001年间,各省收入流动差异并不明显;第四,农民收入水平有条件收敛的趋势,同时,教育水平提高、外出打工,都对农民收入增长有显著的推进作用。     

Entrepreneurship, windfall gains and financial constraints: Evidence from Germany

We investigate the link between the propensity to become an entrepreneur and the exogenous release from financial constraints in Germany. This is defined in terms of the movement from employment to self-employment on receipt of a financial windfall. A theoretical framework developing Evans and Jovanovic (1989) is set up and tested with panel data from German households. The results show that financial constraints do exist given that individuals are more likely to start a personal business after receiving a windfall gain. The value of windfall gains has a significant but non linear effect on the decision to become self employed. The data reveal that differences in ability and income affect the change in employment status. We also report that there is no evidence that becoming self-employed involves the anticipation of windfall gains.     

Income mobility and the Arab spring: the case of Egypt and Jordan

Arab Spring has swept Middle East and North Africa. Although the reasons behind this revolutionary albeit mostly unfruitful social phenomenon is unknown, economic reasons such as income inequality and lack of income mobility have been mentioned. Using an approach that is free of measurement error and attrition biases, this study estimates income mobility in a country that went through Arab Spring, Egypt, and compares that with a similar country that did not experience it, Jordan. The results show that unconditional and conditional income mobility were substantially smaller in Egypt than Jordan. This has implications for the policy-makers not just in the Middle East but the world.     

A test of the household income process using consumption and wealth data

The evolution of household income can be explained almost equally well by rival models. However, rival models have very different implications for other household behaviours, such as consumption. I therefore test between two prominent models in the UK using panel data on consumption and wealth, as well as income, over 1991–2006. To operate the test, I show that long-lived income shocks transmit far less than one-for-one through to consumption, and particularly so for younger households. I then compare these estimates of transmission with estimates of households’ ability to smooth shocks, captured by the data on wealth. Conditional on the suitability of the consumption model, my estimates provide evidence against the restricted income process (RIP) and in favour of an alternative heterogeneous income process (HIP). This finding also explains why cross-sectional consumption inequality grew slowly over the period even though the variance of long-lived shocks was high. Finally, I conclude that it is important to consider mean reversion of shocks when constructing life-cycle consumption models.     

收入增长和收入分配对城市减贫的影响

本文基于对贫困的分解,运用贫困弹性的动态特征,选取《中国统计年鉴》相关年份城市住户分组数据,深入分析收入增长和收入分配因素对中国1991-2009年间城市绝对贫困和相对贫困的影响。结果表明:(1)高速的经济增长对我国城市绝对贫困率下降起决定性作用,但收入分配恶化对城市相对贫困率上升有显著影响。(2)收入水平越高,则收入因素对城市减贫的促进作用越强,且分配因素所引起的贫困变动越大;收入分配越不平等,则收入因素对城市减贫的促进作用越弱,且分配因素所引起的贫困变动越小。因此,我国今后的城市减贫,应在继续保持经济较快增长的同时,以改善收入分配不平等为重点。     

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

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.     

Reference Income Effects in the Determination of Equivalence Scales Using Income Satisfaction Data

We estimate household equivalence scales, i.e. the needs of additional adults and children relative to a single adult, using income satisfaction data from the German Socio‐Economic Panel. We extend previous studies applying this approach by taking reference income into account. This allows separating needs‐based from reference effects in the determination of income satisfaction. We show that this adjustment helps to overcome a bias causing an overestimation of adults’ and an underestimation of children’s needs‐based equivalence weights. Our results indicate that controlling for income comparisons substantially increases children’s equivalence weight relative to that of adults.     

THE FISCAL DIVIDEND MYTH OF AN INCOME/GST TAX SWITCH*

Reaping a windfall fiscal dividend from the taxation of the ‘underground’ economy's expenditures on ‘legitimate’ commodities is often seen as a significant advantage for a goods and services tax (GST) over an income tax. This claim ignores the changes in prices in the underground economy which would arise from the introduction of a GST. Employing a general equilibrium model which allows for tax evasion, we show that any ‘dividend’ arising from a change in the income tax/GST mix is equivalent to a rise in the income tax rate without a GST.