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.
Highlights
The debate on whether higher income in a country is associated with higher life satisfaction is considered of crucial importance for scientific and for policy reasons
The coefficients on the quantile dummies show that life satisfaction strongly increases with Gross Domestic Product (GDP) in low income countries, but the relation becomes much less steep beyond a GDP of 10,000 USD it flattens for countries with a GDP above 15,000 USD
Life satisfaction shows a tendency to decline with GDP for the richest countries, suggesting the existence of a bliss point that lies in the interval between 26,000 and 30,000 2005 USD, in PPP
Summary
The debate on whether higher income in a country is associated with higher life satisfaction is considered of crucial importance for scientific and for policy reasons. In particular from column 1 of table 1, we note that there is a clear significantly positive differential effect (i.e. the coefficients are negative and significant) between life satisfaction of individuals living in the richest countries (with a GDP larger than 38K 2005 USD in the 15th quantile) and individuals in the 7th quantile and below (i.e. individuals living in countries with less than about 10K USD).
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
