The marginal utility of income

TLDR: In this article, the authors estimate the elasticity of marginal utility with respect to income using four large cross-sectional surveys of subjective happiness and two panel surveys over 50 countries and time periods between 1972 and 2005.

About: This article is published in Journal of Public Economics.The article was published on 2008-08-01 and is currently open access. It has received 498 citations till now. The article focuses on the topics: Marginal utility & Population.

Figures

Fig. 1: Histograms of answers to happiness and life satisfaction questions.

Fig. 2: The simple cross-sectional relationship between reported happiness and income in the U.S. General Social Survey.

Table 5: Maximum likelihood estimates of ρ in different subgroups (using a standard linear dependent variable model and with 95% confidence intervals in parentheses).

Table 6: Spline test results showing the estimated δ̂ in Equation 23 (t-score in parentheses), the F -score of the joint restriction β = 0 and δ = 0, and the implied correction to ρ̂.

Table 2: The survey questions for the reported happiness variables we used.

Table 4: Maximum likelihood estimates of ρ in different surveys using first the linear dependent variable model, and then ordered logit. 95% confidence intervals in parentheses.

Frequently asked questions

Q1. What are the contributions mentioned in the paper "The marginal utility of income∗" ?

The authors estimate this parameter using four large cross-sectional surveys of subjective happiness and two panel surveys. The authors also examine whether these estimates ( which are based directly on the scale of reported happiness ) could be biased upwards if true utility is convex with respect to reported happiness. 

Q2. What is the main reason for the downward bias in income?

The downward bias resulting from measurement error in income is exacerbated in fixed effects models (Griliches and Hausman, 1986), so some reduction in the slope coefficient is to be expected14The authors now come to the central analysis of this paper, where the authors directly estimate the curvature of the happiness-income relationship. 

Q3. What is the common question that is asked by Lanot et al. (2006)?

the authors assume that individual i has a level of experienced utility ui which is cardinal and is a function of a set of observable variables3Lanot et al. (2006) includes a survey of measures showing a wide variety of estimates. 

Q4. What is the way to investigate the relationship between happiness and verbal reports?

The authors use three approaches based on this framework:1. Ordered logit: if f is concave and if the error term i is symmetric, then the estimated cut points of the ordered logit will tend to be convex with respect to reported happiness (implying a concave transformation from true utility to reported happiness). 

Q5. What is the negative slope in the top right panel of Figure 4?

The negative slope in the top right panel of Figure 4 would then imply that at the upper end the reported happiness scale is a compressed version of the true utility scale. 

Q6. What is the strategy for examining the function f?

So the authors continue to maintain the assumption of linearity, that isui = α y1−ρi − 11 − ρ + zi + i (14)Conditioning on this assumption, their strategy is then to investigate the function f in the equationhi = f(α y1−ρi − 11 − ρ + zi + i) (15)In particular, the authors see if the authors can find any evidence that f ′′ < 0. 

Q7. How many coefficients of are required to explain the equity premium?

As is well known, explaining the equity premium within expected utility theory requires a coefficient of the order of 30 or even more (Mehra and Prescott, 1985, 2003).