Accessible Requires Authentication Published by De Gruyter March 22, 2021

Adaptation and Loss Aversion in the Relationship Between GDP and Subjective Well-Being

Matti Hovi and Jani-Petri Laamanen

Abstract

We examine the roles of macro-level adaptation — including social comparison effects becoming more important over time — and macroeconomic loss aversion in the time-series relationship between national income and subjective well-being. Models allowing for these phenomena are applied to cross-country panel data. We find evidence for macroeconomic loss aversion that becomes more important over time: the effects of economic growth become small and statistically insignificant in the long run, whereas the effects of contractions are large and long-lasting. The results are consistent with the Easterlin paradox and point to it being explained by macro-level adaptation to economic growth. Our results highlight the importance of allowing for both dynamics to distinguish long-run from short-run effects and asymmetries to recognize the important effects of contractions. Failing to do the former leads to a misleading impression of the long-run relationship between economic growth and well-being.

JEL Classification: O11; I31

Corresponding author: Jani-Petri Laamanen, Faculty of Management and Business, Tampere University, FI-33014 Tampere, Finland, E-mail:

Funding source: Finnish Cultural Foundation

Award Identifier / Grant number: 00170305

Acknowledgements

We would like to thank Petteri Juvonen, Arto Luoma, Tuomas Malinen, Elias Oikarinen, Jari Vainiomäki, and the participants of the Nordic Conference on Behavioral and Experimental Economics in Tampere and the HEIRS conference in Rome and seminar participants in Helsinki, Jyväskylä, Tampere and Turku for helpful comments and discussions. Financial support from the Finnish Cultural Foundation (grant number 00170305) is gratefully acknowledged.

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Supplementary Material

The online version of this article offers supplementary material (https://doi.org/10.1515/bejeap-2020-0204).

Received: 2020-06-29
Accepted: 2021-02-25
Published Online: 2021-03-22

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