The Marginal Utility of Income

We examine whether these estimates could be biased upwards if true utility is convex with respect to reported happiness

Richard Layard

2011

Scholarcy highlights

  • In normative public economics it is crucial to know how fast the marginal utility of income declines as income increases
  • The data cover over 50 countries and time periods between 1972 and 2005
  • In each of the six very different surveys, using a number of assumptions, we are able to estimate the elasticity of marginal utility with respect to income
  • The results are very similar for subgroups in the population. We examine whether these estimates could be biased upwards if true utility is convex with respect to reported happiness
  • We find some evidence of such bias, but it is small - yielding a new estimated elasticity of 1.24 for the combined sample

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