Preferences, Income, and Life Satisfaction: An Equivalence Result

Abstract

In this paper I investigate the nexus between life time utility (life satisfaction) and income predicted by the standard model of endogenous economic growth under different behavioral assumptions. The solution rationalizes why the empirical association between income and life satisfaction is approximately log-linear. I show that the solution is observationally equivalent when individuals compare their consumption (i) with others, (ii) with their own past consumption achievements, and (iii) not at all (ordinary preferences). This finding suggests that the observed slope of the income-life satisfaction curve is uninformative about human behavior driven by reference-dependent utility. In particular, the hypothesis that the flattening of the life satisfaction curve at high income levels indicates that people are comparing their consumption “too much” with others or own past achievements is not supported by the work-horse model of endogenous economic growth.