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Fall 2011
ISSN 0890-913X
Volume 27, Number 1

Happiness, Adaptation, and Decreasing Marginal Utility of Income

Dwight R. Lee, The University of Georgia
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TheJournalofPrivateEnterprise27(1),2011,6373Happiness,Adaptation,andDecreasingMarginalUtilityofIncomeDwightR.Lee*SouthernMethodistUniversityAbstractHappinessstudiesbothsupportandquestiondiminishingmarginalutilityofincome.Cross-sectionalstudiessupportthepropositionthatmarginalutilityofincomedeclineswithincome,butlongitudinalstudiesindicatethatmarginalutilityofincomeiszerooncebasicneedsaremet.Adaptationtoincomeincreaseshasbeenusedtoreconcilethesetwoempiricalresults.Thisseemstosuggestthatthemarginalutilityofincomedecreasesintheshortrun,butnotinthelongrun,overawiderangeofincomeinwealthycountries.Makinguseoflossaversion,however,itisshownthatincometransfersfromtherichtothepoorarelikelytoreducetotalutilityintheshortrunwhilehavingnolong-runeffect.JELCodes:D31,D63,H24Keywords:Adaptation;Happiness;Incomemarginalutility;TransfersI.IntroductionIthaslongbeenarguedthattransferringincomefromtherichtothepoorincreasestotalutility(orhappiness)becauseofdecreasingmarginalutilityofincome.Ofcourse,beforeincomeequalityisachieved,furthertransfersreduceincomegrowthbyenoughtooffsetanyadditionalutilitygainfromreducingfurtherthemarginalutilitygapbetweentherichandpoor.1Thepropositionthatapoorpersonreceivesalargerutilitygainfromanadditionaldollarthanarichoneisintuitivelyplausible.Yet,therapidlyexpandinghappinessresearchinitiatedbyEasterlin(1974)findsempiricalpatternsthatboth*IwouldliketothanktheEarhartFoundationforsupportingmyworkonthispaper.IwouldalsoliketothankMichaelDavis,MichaelDeBow,SteveJackstadt,RichardMcKenzie,thelateEugeneMiller,TomSaving,GeorgeSelgin,andAmyWillisforinsightfulresponsestomyquestionsandcommentsoverthelastfewyearsontheconnectionbetweenhappinessandincome.IwouldalsoliketothankRichardEasterlinandananonymousrefereeforcommentsthatgreatlyimprovedthispaper.Thenormaldisclaimerapplies.1Forexamples,seeBreitandCulberson(1970)andMirrelles(1971).63
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