Analyzing the relationship between income and life satisfaction of Forest farm households - a behavioral economics approach

Abstract

Neoclassical economic theory assumes that absolute income is positively associated with individuals' experienced utility. Behavioral economics literature has provided diverse views on the relationship between income and subjective wellbeing. Using a unique survey dataset of forest farm households in Fujian Province, China, this study investigates the relationship between absolute and relative income and the life satisfaction of forest farm households. Specifically, we empirically tested the three properties derived from the prospect theory，namely reference dependence, loss aversion, and diminishing sensitivity. The results provided evidences to support the reference dependence property, demonstrating that the relative and average incomes of the social reference group are more important than the absolute income of individual farm households. Higher relative income was found to be associated with a higher level of life satisfaction among forest farm households, while the loss aversion property was also confirmed. However, we found no evidence to support the diminishing sensitivity property. As the first paper to apply the behavioral economics approach to investigate the subjective wellbeing of forest farm households, our results showed both relative income and income inequality posed positive impacts on life satisfaction of the forest farm households, which provided empirical evidences to validate tunneling effects under China's context. We also believe that the positive spillover effects of public goods contribute to the promotion of forest farmers' life satisfaction, which highlights the pivotal role of policy implementation in optimizing the distribution of income among forest farm households.