Happiness and economic prosperity

Abstract

In this chapter, the authors review existing research on the associations between economic prosperity and happiness (or subjective well-being) in psychological and economic literature. Most cross-sectional studies converge on reporting a small-to-moderate positive correlation between income and subjective well-being, with stronger relationships reported for life satisfaction and negative (but not positive) emotions. The effect of income on happiness has been shown in longitudinal and quasi-experimental studies as well, suggesting that rises in income might lead to gains in happiness, although the evidence for such causal effects remains weak. Seeking to understand the mechanism behind the income–happiness link, the literature has broadly relied on two theoretical perspectives: needs satisfaction and relative standards theories. According to the former, income contributes to happiness as it allows people to satisfy their needs and desires. This explanation has found support in studies showing that income has a particularly strong effect when it contributes to needs satisfaction most – in poor (vs wealthy) individuals and in residents of poor (vs wealthy) countries. According to the relative standards theories, income contributes to happiness to the extent that it allows one to make downward social comparisons. Consistent with this account, studies have shown both absolute and relative income to be positively associated with happiness. Finally, the authors document a number of important moderators and boundary conditions of the income–happiness link, including individual differences in dispositional characteristics, consumption and spending patterns. The chapter concludes by pointing to so far unresolved questions and sketching potential directions for future studies.