Lecture 1: Happiness and Growth

Transcription

1 Lecture 1: Happiness and Growth Eugenio Proto March 13, 2009 Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

2 Happiness and Utility Implies cardinal Utility and Interpersonal Comparison Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

3 Happiness and Utility Implies cardinal Utility and Interpersonal Comparison Ordinalism: utility determined by choices if I choose A to B I rank u(a) > u(b). Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

4 Happiness and Utility Implies cardinal Utility and Interpersonal Comparison Ordinalism: utility determined by choices if I choose A to B I rank u(a) > u(b). Cardinalism implies a objective measure of the Utility Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

5 Happiness and Utility Implies cardinal Utility and Interpersonal Comparison Ordinalism: utility determined by choices if I choose A to B I rank u(a) > u(b). Cardinalism implies a objective measure of the Utility Unnecessary to determine a demand function Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

6 Happiness and Utility Implies cardinal Utility and Interpersonal Comparison Ordinalism: utility determined by choices if I choose A to B I rank u(a) > u(b). Cardinalism implies a objective measure of the Utility Unnecessary to determine a demand function Necessary for Public Choice (Arrow impossibility theorem) Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

7 Happiness and Utility (cont d) Pro-Ordinalism: How could you even tell if you like one bundle twice as much as another? Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

8 Happiness and Utility (cont d) Pro-Ordinalism: How could you even tell if you like one bundle twice as much as another? But: Assume that: A is your current situation, B is A plus an Ant Bite, and C is A plus being eaten by a crocodile. Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

9 Happiness and Utility (cont d) Pro-Ordinalism: How could you even tell if you like one bundle twice as much as another? But: Assume that: A is your current situation, B is A plus an Ant Bite, and C is A plus being eaten by a crocodile. Ordinalism can say u(a) > u(b) > u(c ) Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

10 Happiness and Utility (cont d) Pro-Ordinalism: How could you even tell if you like one bundle twice as much as another? But: Assume that: A is your current situation, B is A plus an Ant Bite, and C is A plus being eaten by a crocodile. Ordinalism can say u(a) > u(b) > u(c ) but not that u(a) u(b) > u(b) u(c ) Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

11 Happiness and Utility The main idea is that there exists a reported well-being function r i,j = h(u(y, z, t)) + e i,j e i,j individual speci c error term, z demographic characteristics, y socioeconomic determinants Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

12 Empirical Determinants Suitable for estimation as an ordered probit or logit: h = a + bz + cy Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

13 Easterlin Paradox Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

14 Easterlin Paradox (cont d) Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

15 Easterlin Paradox (cont d) Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

16 Easterlin Paradox (cont d) 1 Regressions of happiness on income using cross-section survey data from one country generally produce a signi cant positive estimated coe cient on income. The income happiness slope is larger in developing or transition than in developed economies. Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

17 Easterlin Paradox (cont d) 1 Regressions of happiness on income using cross-section survey data from one country generally produce a signi cant positive estimated coe cient on income. The income happiness slope is larger in developing or transition than in developed economies. 2 Recent work has used panel data to control for unobserved individual xed e ects, such as personality traits, and concludes that changes in real incomes are correlated with changes in happiness Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

18 Easterlin Paradox (cont d) 1 Regressions of happiness on income using cross-section survey data from one country generally produce a signi cant positive estimated coe cient on income. The income happiness slope is larger in developing or transition than in developed economies. 2 Recent work has used panel data to control for unobserved individual xed e ects, such as personality traits, and concludes that changes in real incomes are correlated with changes in happiness 3 Recent detailed studies of the macroeconomics of happiness shown that happiness co-moves with macroeconomic variables including GDP, GDP growth, and in ation Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

19 Easterlin Paradox (cont d) 1 Regressions of happiness on income using cross-section survey data from one country generally produce a signi cant positive estimated coe cient on income. The income happiness slope is larger in developing or transition than in developed economies. 2 Recent work has used panel data to control for unobserved individual xed e ects, such as personality traits, and concludes that changes in real incomes are correlated with changes in happiness 3 Recent detailed studies of the macroeconomics of happiness shown that happiness co-moves with macroeconomic variables including GDP, GDP growth, and in ation How to reconcile Easterlin Paradox with 1-3? Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

20 Theory: Relative Income Individual Utility U t = U(u 1 (Y t ) + u 2 (Y t /Y t ) + u 3 (T l t, Z t )) For example U t = α ln(y t ) + β ln(y t /y t ) + γz t Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

21 Theory: Relative Income Individual Utility U t = U(u 1 (Y t ) + u 2 (Y t /Y t ) + u 3 (T l t, Z t )) For example U t = α ln(y t ) + β ln(y t /y t ) + γz t y t reference income, example pc GDP Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

22 Relative income (cont d) Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

23 Relative Income (cont d) Individuals utility gain from living in a relatively successful country. U t = β 1 ln(y i,j,t ) + β 2 ln(y i,j,t /y j,t) + β 3 ln(y j,t /y t ) + γz t Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

24 Relative Income (cont d) Individuals utility gain from living in a relatively successful country. U t = β 1 ln(y i,j,t ) + β 2 ln(y i,j,t /y j,t) + β 3 ln(y j,t /y t ) + γz t i.e. β 3 is positive and signi cant Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

25 Relative Income (cont d) Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

26 Suboptimality with relative Income If we consider non status activity: U t = β 1 ln(y i,t ) + β 2 ln(y i,t /y t ) + γ ln(t y i,t /ω t ) Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

27 Adaptation a reduction in the a ective intensity of favorable and unfavorable circumstances. U t = β 1 ln(y i,t ) + β 2 ln(y i,t /y t ) + γz t y t = (y t 1 ) α (y t 2 ) γ (y t 3 ) 1 α γ Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

28 Adaptation a reduction in the a ective intensity of favorable and unfavorable circumstances. U t = β 1 ln(y i,t ) + β 2 ln(y i,t /y t ) + γz t y t = (y t 1 ) α (y t 2 ) γ (y t 3 ) 1 α γ short-run e ect of an increase in log income equals β 1 + β 2, whilst the longrun e ect is only β 1. Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

29 Adaptation (cont d) Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

30 Adaptation (cont d) Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

31 Growth and Happiness Growth has little impact on happiness, in developing countries since increase in U(c) is low for high c and the term u 2 (y t /y t ) might not change since they tend to move together ( keeping up with the Joneses ) Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

32 Growth and Happiness Growth has little impact on happiness, in developing countries since increase in U(c) is low for high c and the term u 2 (y t /y t ) might not change since they tend to move together ( keeping up with the Joneses ) Importance of the income distribution during the growth process. Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

33 Growth and Happiness Growth has little impact on happiness, in developing countries since increase in U(c) is low for high c and the term u 2 (y t /y t ) might not change since they tend to move together ( keeping up with the Joneses ) Importance of the income distribution during the growth process. However we must consider other e ect of growth that do not change happiness. Length of Life, Induced long run Progress, capacity of withstand foreign aggressor Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

34 Growth and Happiness Growth has little impact on happiness, in developing countries since increase in U(c) is low for high c and the term u 2 (y t /y t ) might not change since they tend to move together ( keeping up with the Joneses ) Importance of the income distribution during the growth process. However we must consider other e ect of growth that do not change happiness. Length of Life, Induced long run Progress, capacity of withstand foreign aggressor Since u1 0 (y) is decreasing individuals should supply less labour, but term u 2 (y t /yt ) may have the opposite e ect ( keeping up with the Joneses ). Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18

35 Growth and Happiness Growth has little impact on happiness, in developing countries since increase in U(c) is low for high c and the term u 2 (y t /y t ) might not change since they tend to move together ( keeping up with the Joneses ) Importance of the income distribution during the growth process. However we must consider other e ect of growth that do not change happiness. Length of Life, Induced long run Progress, capacity of withstand foreign aggressor Since u1 0 (y) is decreasing individuals should supply less labour, but term u 2 (y t /yt ) may have the opposite e ect ( keeping up with the Joneses ). Same reasoning for saving, if we assume that individuals have a reference point increasing with their ages, they have an incentive to save again to keeping up with the Joneses Eugenio Proto () Lecture 1: Happiness and Growth March 13, / 18