Identifying Welfare Effects from Subjective Questions

Abstract

We argue that the welfare inferences drawn from answers to subjective–qualitative survey questions are clouded by concerns over the structure of measurement errors and how latent psychological factors influence observed respondent characteristics. We propose a panel data model that allows more robust tests and we estimate the model on a high‐quality survey for Russia. We find significant income effects on an individual’s subjective economic welfare. Demographic effects are weak at given income per capita. Ill‐health and becoming unemployed lower welfare at given current income, although the unemployment effect is not robust, and returning to work does not restore welfare without an income gain.