Openness, Income Inequality, and Happiness: Evidence from China

Despite the vast literature on the various determinants of happiness, very little is known about how financial and trade openness may affect people’s happiness in the current literature. In this paper we attempt to fill in this blank using a large survey data from China. We find that while income inequality indeed has a significantly negative effect on happiness, there also exists a notable happiness-enhancing effect of openness via the inequality channel. Further analysis reveals that even after taking into account the possible happiness loss associated with openness, the net effect of openness on happiness remains positive in most cases. The results of the paper extend the previous literature by highlighting the important effects of financial and trade openness in improving people’s happiness and how these effects may interact with income inequality. From a policy perspective, the results of the paper suggest that increasing openness of the economy would be an important strategy that policymakers could use to improve people’s happiness, especially in the context of rising inequality in most developing and developed countries.