Testing the Existence of Hedonic Adaptation and Inertia to Income with implications for Islamic economics: a case of Pakistan

The fact that happiness does not increase as income increases (Easterlin Paradox) has puzzled a number of scholars for a number of decades. The latest research on this topic concludes that happiness increases with an increment in income in the short term but it adapts to this income increment in the long term. What is the Islamic economics explanation for hedonic adaptation to income? It is argued that Islamic economics should predict a non-existence of hedonic adaptation to income for a society completely following Islamic code of life since it, fully or partially, delinks happiness from income. Testing the existence of hedonic adaptation to income is, therefore, an indirect way to assess whether a society pursing a materialistic goals or following a life enjoin in Qur’an and the Sunnah of the Holy Prophet Mohammad (peace be upon him). The first objective of this research is to test whether happiness adapts to income increase in the short run using two-period panel survey in Pakistan. The second objective is to formulate happiness function by incorporating dimensions of zakat and remembrance of Allah (zikr) to highlight possibility of sustain happiness without adaptation to income in the light of Islamic teachings. The paper applies Random Effect Ordered Probit model to investigate the hedonic adaptation effect using various formulations used in the happiness literature. The results show that there is no adaptation to income in Pakistan given the time period. The result is consistent with the studies that show no adaptation during a short period. However, the models used here are not controlled for zakat and zikr due to data unavailability. Hence, Islamic economics implications are derived only theoretically. The significance of the present research lies in the fact that it is the first study in Pakistan that tests the hedonic adaptation to income and hence contributes to the evidence on happiness dynamics. Moreover, it is also the first study that formulates a happiness function from Islamic perspective and highlights happiness dimension of zakat. These are important contributions in Islamic economics literature.