Tuesday, May 2, 2017

Clark (2014) on Adaptation and Easterlin

Andrew E. Clark, “Adaptation and the Easterlin Paradox.” Paris School of Economics, October, 2014 [pdf].

• One explanation of the Easterlin Paradox is that people care about relative, not absolute, incomes. A second explanation, addressed here, is that people adapt their reference point to reflect a higher income and so receive no extra subjective well-being (SWB) when the adaptation is complete. 

• The existing empirical evidence shows a good deal of adaptation to permanently higher incomes, but often, not full adaptation. Increasing income inequality, where richer people have recent higher-than-normal gains, can lead to a positive association in cross-sectional data between income and SWB. 

• But perhaps other contributors to well-being – employment life, health, family life, for example – are not as subject to adaptation as is income. Unemployment seems to be fairly resistant to adaptation – many people are as worse off (in terms of happiness) a few years into unemployment as they are when they first become unemployed. The same lack of adaptation applies to falls into poverty. This is the case only on average, of course, and perhaps we could invest in resilience so that adaptation to negative events would be more common. 

• On average, the happiness of marriage is subject to adaptation, so that the initial happiness boost (in many countries) is eliminated over time. Divorce is associated with a notable fall in subjective well-being that precedes the divorce for a few years, but by and large, this decline is eliminated a few years post-divorce through adaptation. Having children has no impact, on average, in long-term SWB. 

• People somewhat adapt to bad health events, but that adaptation tends to be far from complete. (Cosmetic surgery brings lasting SWB benefits (page 11)!)

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