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How are Income and Non-Income Factors Different in Promoting Happiness? An Answer to the Easterlin Paradox

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  • Tian, Guoqiang
  • Yang, Liyan

Abstract

This paper develops a formal economic theory to explain the Easterlin paradox-average happiness levels do not necessarily increase as countries grow wealthier. The theory analyzes the different roles of income and non-income factors in promoting people's happiness, and provides a foundation for studying happiness from the perspectives of social welfare maximization and individuals' self-interested rationality. It is shown that, for a certain class of economies, whether Easterlin paradox appears depends on the level of non-income factors. Happiness rises with income only up to a critical point that is determined by the level of the non-income factors; but once the critical income level is achieved, raising income further will lead to Pareto ineffcient allocations and decrease people's happiness. One policy implication is that government should promote a balanced growth between income and non-income factors. The empirical analysis provides some preliminary evidence consistent with the theory's predictions.

Suggested Citation

  • Tian, Guoqiang & Yang, Liyan, 2005. "How are Income and Non-Income Factors Different in Promoting Happiness? An Answer to the Easterlin Paradox," MPRA Paper 41209, University Library of Munich, Germany, revised Mar 2010.
    • Handle: RePEc:pra:mprapa:41209
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    References listed on IDEAS

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    More about this item

    Keywords

    Easterlin Paradox; Happiness; Social Comparison; Pareto Optimality;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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