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Growth, Inequality and Tunnel Effects: A Formal Mode

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  • Lewis Davis

    (Union College)

Abstract

Hirschman and Rothschild’s (Q J Econ 87(4):544–566, 1973) tunnel effect refers to the propensity for individuals to be pleased by the success of others if they believe this signals an improvement in their own prospects. According to the current literature, tunnel effects may offset the utility losses from increases in peer income levels and income inequality. I develop a simple model of tunnel effects to evaluate these two channels of influence. The analysis confirms that tunnel effects create a positive link between happiness and economic growth. In contrast, rising income inequality generates a tunnel effect that increases the happiness of the rich but decreases happiness among the poor. The analysis confirms Hirschman and Rothschild’s informal analysis indicating that that tunnel effects may increase the happiness of the poor in the case of uneven development that involves both growth and rising income inequality. The model also highlights the differential impact of tunnel effects across age and income groups within the population. I close by discussing the model’s implications for empirical investigations of tunnel effects.

Suggested Citation

  • Lewis Davis, 2019. "Growth, Inequality and Tunnel Effects: A Formal Mode," Journal of Happiness Studies, Springer, vol. 20(4), pages 1103-1119, April.
    • Handle: RePEc:spr:jhappi:v:20:y:2019:i:4:d:10.1007_s10902-018-9991-1
    DOI: 10.1007/s10902-018-9991-1
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    References listed on IDEAS

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    More about this item

    Keywords

    Happiness; Subjective wellbeing; Inequality; Social status; Relative income; Tunnel effects;
    All these keywords.

    JEL classification:

    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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