How Equality Matters for Life Satisfaction

With Sandeep Kapur and Gylfi Zoega, under submission.

Abstract

We consider two possible channels of the possible impact of income inequality on life satisfaction in OECD countries. First, in the spirit of Duesenberry’s relative income hypothesis, we explore whether the happiness of nations is adversely affected by income inequality within countries. Second, we suggest that even if each individual’s happiness depended solely on the level of her own income, an increase in inequality will reduce average life satisfaction for a given level of average income due to the concavity of the relationship between happiness and income, a new result. Using OECD data, we find empirical support for both phenomena.