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Fall 2011

ISSN 0890-913X

Volume 27, Number 1

Categories: Liberalism | Fall 2011

Happiness, Adaptation, and Decreasing Marginal Utility of Income

Dwight R. Lee, University of Georgia and Ball State University

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TheJournalofPrivateEnterprise27(1),2011,63–73Happiness,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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Title	Happiness, Adaptation, and Decreasing Marginal Utility of Income
Authors/Creators:	Dwight R. Lee, University of Georgia and Ball State University
Year:	2011
Volume:	27
Number:	1
Pages:	63 - 73
Publisher:	The Association of Private Enterprise Education
ISSN:	0890-913X
Document Type:	Articles
Keywords:	Adaptation, Happiness, Standard of living, Income, Marginal utility, Transfers, Freedom

Citation:
Lee, Dwight R. / 2011. "Happiness, Adaptation, and Decreasing Marginal Utility of Income." The Journal of Private Enterprise, 27(1): 63-73.