No. 2018-07 - People do not adapt to income changes: A re-evaluation of the dynamic effects of (reference) income on life satisfaction with GSOEP and UKHLS data

Date: 06 November 2018

Do people adapt to changes in income? This paper shows that there is no evidence of adaptation to income in GSOEP (1984-2015) and UKHLS (1996-2015) data. Following the empirical approach of Vendrik (2013), I arrive at this surprising answer by estimating (dynamic) life satisfaction equations, in which I simultaneously enter contemporaneous and lagged terms for a respondent’s own house- hold income and their estimated reference income. Additionally, I instrument for own income and include lags of a large set of controls. Furthermore, I find that people also do not adapt to changes in reference income. Instead, reference income effects may be subject to reinforcement over time. To explain my findings, a comprehensive account of the puzzling and often divergent results of ...

Caspar Kaiser

Employment, Equity and Growth

No. 2018-07 - People do not adapt to income changes: A re-evaluation of the dynamic effects of (reference) income on life satisfaction with GSOEP and UKHLS data


Type: inet-working-paper

Kaiser, C. (2018). 'People do not adapt to income changes: A re-evaluation of the dynamic effects of (reference) income on life satisfaction with GSOEP and UKHLS data'. INET Oxford Working Paper No. 2018-07.


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