This paper presented an empirical test of four hypotheses about the importance of
income and bcomparison incomeQ for individual well-being. The empirical analysis has
taken the responses to a life satisfaction question as a measure for individual wellbeing
or happiness. The data used is a sub-sample of a large German micro-panel data
set (GSOEP). The estimation results distinguish between (former) East and West
Germans.
The relevance of the present study lies in two features. First, it contributes to the
small empirical literature on the impact of interdependent preferences on individual
well-being. This is especially true when looking at the studies that, like this one, use
micro-data and measure well-being by means of self-reported answers to a life
satisfaction question. Second, it differs from other studies, as it tests four different
hypotheses of the relation between income and individual well-being. The four
specifications are based on the following hypotheses: (1) only an individual’s own
family income is important; (2) individual well-being depends on the income of the
reference group; or, (3) on the difference between an individual’s own income and the average income of the reference group; and (4) income comparisons are dupwardsT.
The empirical analysis estimates individual subjective well-being by means of an
Ordered Probit model with individual random effects. The regression includes a large
set of variables, such as education and working status.
The main conclusions can be summarized as follows: (1) even if income has a
small effect on individual well-being, the effect is not insignificant when compared
with other objective variables; (2) the impact of income on individual well-being is
larger for East than for West Germans, which makes sense, given that Easterners are
poorer than Westerners; (3) increases in family income accompanied by identical
increases in the income of the reference group do not lead to significant changes in
well-being; (4) the larger an individual’s own income is in comparison with the
income of the reference group, the happier the individual is; and (5) for Westerners
and for the total German sample, the comparison effects are asymmetric; this means
that poorer individuals’ well-being is negatively influenced by the fact that their
income is lower than that of their reference group, while richer individuals do not get
happier from having an income above the average. In other words, comparisons are
mostly dup-wards.