Preferences, income, and life satisfaction: An equivalence result

In this paper I investigate the nexus between life time utility (life satisfaction) and income predicted by the standard model of endogenous economic growth under different behavioral assumptions. The solution rationalizes why the empirical association between income and life satisfaction is approximately log-linear. I show that the solution is observationally equivalent when individuals compare their consumption (i) with others, (ii) with their own past consumption achievements, and (iii) not at all (ordinary preferences). This finding suggests that the observed slope of the income – life satisfaction curve is uninformative about the presence and strength of habits or referencedependent utility. The theory offers also an explanation why empirical studies have difficulties to identify a positive impact of long-run economic growth on life satisfaction.