Do people adapt to changes in income and other circumstances ?

This paper deals with the question whether or not individuals adapt their satisfaction norms to income changes. We distinguish between an initial primary effect and a lagged secondary effect. If there is a negative rebound effect, satisfaction norms adapt. Individual satisfaction is proxied by two subjective measures, one capturing individual self-reported satisfaction with life and the other with income. The empirical analysis makes use of a panel micro -data set of annual observations, which allows following the same individual across time. In addition, the paper tests for different utility specifications. The main conclusions of this paper are that: the individual's adaptation of life satisfaction norms over time to income changes is only partial, depending strongly on the specification of the utility model. For financial satisfaction we do not find significant rebound effects. This may imply that the 'hedonic treadmill' does not work or that financial satisfaction norms adapt within one year to the new situation. In addition we find that the effect of income changes on happiness depends on whether individuals ́ income increases or decreases (asymmetry). We also look at adaptation to other life events, such as changes in marital status and in employment status. The main conclusion is that adaptation patterns differ for the various life events and for different domains.