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The Easterlin Paradox: Empirics on the Income-Happiness Relationship sans Hedonic Adaptation Dr. Edsel L. Beja Jr. ATENEO DE MANILA UNIVERSITY

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Easterlin Paradox

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Easterlin long run relationship between income and happiness is nil

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Stevenson-Wolfers long run relationship between income and happiness is positive (and stat. significant)

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Methodology: Intro h i = b 0 + b 1 g i + error i, where: h i = ΔH, and H is ave happiness of country g i = ΔY, and Y is log income of country using h as dependent variable implies no happiness adaptation

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Methodology: Intro H = f(Y – AY) where AY is adaptation level ΔH = f(ΔY – ΔAY) Define AY = aY -1 + (1 – a)AY -1 … where a represents the rate of adaptation Rearranging, ΔAY = a(Y -1 – AY -1 )… Substituting… ΔH = ΔY – a(Y -1 – AY -1 ) ΔH = f(ΔY – aH -1 ) Or, H = ΔY + (1 – a)H -1

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Methodology: Intro ΔH = f(ΔY) h i = b 0 + b 1 g i + error i, where: h i = ΔH, and H is ave happiness of country g i = ΔY, and Y is log income of country

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Methodology: Dynamic h it = a 0 + Σb j g i,t-j + Σd k-1 h i,t-k + error it where: j = 0…p lags k = 1…q lags autoregressive distributed lag model with p lags on economic growth and q lags on happiness on the assumption that current and past information on both economic growth and happiness are relevant.

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Methodology: Multilevel h it = a 0 + Σb j g i,t-j + Σd k-1 h i,t-k + error it a 0 = φ 00 + u 0t where: φ 00 is b/w country-averages across time u 0t is the b/w country-averages variation h it = φ 00 + Σb j g i,t-j + Σd k-1 h i,t-k + (u 0t + error it )

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Results Dynamic panelMultilevel reg Growth(t)0.002, p = 0.0950.001, p = n.s. Growth(t-1)0.003, p < 0.0010.003, p < 0.05 Sum (dynamic) = 0.005, p < 0.01 0.0038 LR Sum (multilevel) = 0.004, p < 0.05 0.0032 LR

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Analysis A unit of (LR) economic growth has 0.003 impact on happiness If ave. long-run growth rate is 1.95, then 0.003 x 1.95 = 0.00585 Suppose ave. happiness is 3.0 in a 4 unit scale. To raise ave. happiness to 3.1, then 0.1 / 0.00585 = 17.09 years.

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Conclusion Reject the Easterlin Paradox based on the statistical significance of results (i.e. that is, there is indeed positive income-happiness relationship) Accept the Easterlin Paradox based on the economic non-significance of results. The estimates can be taken as a refutation of the Easterlin Paradox if they have econo- mic meaning.

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