Paper

Income Comparisons, Income Adaptation, and Life Satisfaction: How Robust Are Estimates from Survey Data?

Pfaff, Tobias

2013

Overview

Theory suggests that subjective well-being is affected by income comparisons and adaptation to income. Empirical tests of the effects often rely on self-constructed measures from survey data. This paper shows that results can be highly sensitive to simple parameter changes. Using large-scale panel data from Germany and the UK, I report cases where plausible variations in the underlying income type substantially affect tests of the relationship between life satisfaction, income rank, reference income, and income adaptation. Models simultaneously controlling for income and income rank as well as models with a number of income lags are prone to imperfect multicollinearity with consequences for the precision and robustness of estimates. When testing relative-income effects, researchers should be aware that reference income constructed as average of a rather arbitrarily defined reference group and reference income predicted from Mincer-type earnings equations are two approaches that can produce inconsistent results, and that are probably not as reliable and valid as previously assumed. The analysis underlines the importance of robustness checks and regression diagnostics, two routines that are often not carried out diligently in empirical research.

• Publisher: Federal Reserve Bank of St. Louis