Income and Happiness: New Results from Generalized Threshold and Sequential Models

Empirical studies on the relationship between income and happiness commonly use standard ordered response models, the most well-known representatives being the ordered logit and the ordered probit. However, these models restrict the marginal probability effects by design, and therefore limit the analysis of distributional aspects of a change in income, that is, the study of whether the income effect depends on a person’s happiness. In this paper we pinpoint the shortcomings of standard models and propose two alternatives, namely generalized threshold and sequential models. With data of two waves of the German Socio-Economic Panel, 1984 and 1997, we show that the more general models yield different marginal probability effects than standard models. JEL Classification: C25, I31