Consumption and Life Satisfaction: A Micro Panel Data Study

Many studies have estimated the relationship between income and well-being. However, economic theory predicts that well-being derives from consumption, not income. Using newly available US micro-level panel data, we show that consumption has much larger effects on life satisfaction than does income. We find no evidence for life satisfaction satiating in consumption. We also show that spending on conspicuous consumption, such as clothing and vacations, affects life satisfaction more than does spending on non-conspicuous consumption. These results suggest that social comparison may underlie the relationship between consumption and life satisfaction.