Does Happiness Adapt to Increase in Income? Evidence from Pakistan Socio-economic Survey (1998-2001)

Hamid Hasan

Abstract


The fact that happiness does not increase as income increases
over time [the Easterlin Paradox (1974)] has puzzled a number of
scholars for a number of decades. The latest research on this topic
[Easterlin, et al. (2010)] concludes that happiness increases with an
increment in income in the short term but it adapts to this income
increment in the long term. The objective of this research is to test
whether happiness adapts to income increase in the short term using
two-period panel Pakistan Socio-Economic Survey [PSES (1998-2001)]. The
paper makes use of a unique question on happiness asked in PSES to
resolve two issues simultaneously: unavailability of happiness question
in period 1 and potential inconsistency of responses to general
happiness question. The paper applies Random Effect Ordered Probit model
to investigate the hedonic adaptation effect using various formulations
used in the happiness economics literature. The results show positive
and statistically significant impact of income change on happiness with
weak evidence of adaptation to income since it is statistically
insignificant. The result is consistent with the studies that show no
adaptation during a short period. Among several reasons for hedonic
adaptation, falling positive emotions and rising aspirations are
discussed along with causes of happiness and policy implications. The
significance of the present research lies in the fact that it is the
first study in Pakistan that tests the hedonic adaptation to income and
hence contributes to the evidence on happiness dynamics. JEL
Classification: I31, D60, C25 Keywords: Happiness, Adaptation, Income,
Panel Ordered Probit Model

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DOI: https://doi.org/10.30541/v55i2pp.113-122

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