Subjective well-being, income and relative concerns in the UK

Summary

We present an empirical model aimed at testing the relative income
hypothesis and the effect of deprivation relative to mean income on
subjective well-being. The main concern is to deal with subjective panel
data in an ordered response model where error homoskedasticity is not
assumed. A heteroskedastic pooled panel ordered probit model with
unobserved individual-specific effects is applied to micro-data
available in the British Household Panel Survey for 1996–2007. In this
framework, absolute income impacts negatively on both completely
satisfied and dissatisfied individuals, while relative income affects
positively the most satisfied ones. Such an effect is asymmetric,
impacting more severely on the relatively poor in the reference group.
We argue that our results buttress the validity of the relative income
hypothesis as an explanation of the happiness paradox.