SWB and the economy Flashcards
What did Deaton and Kahneman (2010) find about high income and well-being?
They found high income improves evaluative well-being (life satisfaction), but not emotional well-being (day-to-day affect), suggesting diminishing returns beyond a certain income threshold.
What are the two components of reference dependence in subjective well-being?
- Adaptation over time (to income or status changes)
- Social comparison (how one’s income compares to others’)
What is the Relative Income Effect?
It refers to the impact of an individual’s income relative to others in their reference group on their subjective well-being. People often compare their earnings to peers, affecting happiness.
What did Luttmer (2005) find about neighbours’ income and well-being?
Higher neighbour income is associated with lower individual SWB, despite increased satisfaction with one’s area. People sacrifice leisure and friendships to keep up materially.
What did Bursztyn et al. (2018) show about status goods and consumption?
They showed demand for platinum credit cards (a status good) increased when its exclusivity was maintained. Self-esteem reduced demand for status goods, suggesting people signal status when insecure.
What is positional externality (Frank, 1997)?
A positional externality occurs when individual consumption affects others’ utility via social comparison. Status competition leads to socially suboptimal resource allocation (e.g. longer workweeks, less leisure).
What is the idea of comparison-concave utility (Clark & Oswald, 1996, 1998)?
It suggests individuals increase effort when they fall behind others, generating following behaviour and potential expenditure cascades. Deviance occurs when comparison utility is convex.
What is an expenditure cascade (Frank, 2005)?
When top earners spend more, others below them also increase consumption to keep up, pressuring all income groups. This increases inequality and reduces well-being.
How does unemployment affect subjective well-being?
Unemployment significantly reduces SWB, even beyond the income loss. It also creates spillover effects by increasing fear and stress among the employed (Di Tella et al., 2001).
How does inflation impact well-being compared to unemployment?
Inflation reduces well-being, but less than unemployment. Di Tella et al. (2003) estimate trade-offs using SWB data, showing the psychic cost of unemployment is especially high.
How do projection bias and reference adaptation relate in this context?
People often underestimate how changing their income/status changes their reference group, leading to mistaken expectations about future well-being and excessive effort to gain status.
What are ‘internalities’ in well-being economics?
Internalities are self-imposed costs due to neglecting adaptation. For example, over-consuming early in life due to projection bias and underestimating future preferences.
