Essays in Happiness Economics

The goal of this dissertation is to contribute to the new field of happiness economics which over the past several decades has substantially enhanced our understanding of cognitive judgment, human behavior, and the nature of happiness. Chapter 1 starts with a discussion of the subjective approach to measuring well-being and lays the foundation for the empirical work that follows in chapters 2 and 3. This approach has a strong appeal because ancient and modern cultures, and a long tradition in philosophy, view achieving happiness as the ultimate goal of human existence. It also recognizes that humans are the best judges of their own condition. In this first chapter, I discuss some common ambiguities related to the term happiness and outline some of the most common ways in which subjective well-being (SWB)data is measured. Next, I discuss how reliable subjective well-being data is and what are some of its strengths and weaknesses in the context of economic research. Some major insights from the growing literature on happiness economics are also provided and alternative approaches to measuring quality of life (and well-being) are suggested in the last section. One puzzle in the happiness economics literature has been that although real incomes have substantially improved over the past 40 years, happiness levels in the United States have stagnated. In chapter 2, I show that the rising level of income inequality in the United States since the 1970s can explain the stagnating happiness levels of Americans. First, using subjective well-being data from the General Social Survey, I estimate the concavity of the utility function within a neo-utilitarian framework of welfare analysis and calculate the Atkinson index of inequality. Although the estimates suggests that Americans have become increasingly more inequality-averse over time, the results suggest that the concavity of the utility function alone cannot explain the happiness patterns observed in the past several decades. Once I account for the negative external cost from economic inequality, however, the empirical analysis implies that economic growth has not been sufficient to compensate for the loss of subjective well-being associated with the rising level of inequality. This is consistent with the findings of several different surveys on subjective well-being. Finally, I evaluate the equality-efficiency trade-off in the US, and discover a small and positive trade-off. Chapter 3 considers another important policy topic in recent years -- the increasing cost of college tuition and the scrutinized value of higher education. Using subjective well-being data, I show that higher education has a large non-monetary (happiness) return that goes beyond the benefit of finding a better paid and more satisfying job. A person with a high school degree, for instance, would have to earn \$41,683 more per year to be equally as happy as somebody with a college degree that has a similar socio-economic background. This large non-monetary return is associated with better marriage, health, and parenting choices, and stronger social networks that translate into higher levels of interpersonal trust. The lion\u27s share of this non-monetary return is earned in college while the majority of the returns from graduate school are associated with higher salary. This return varies among the different subgroups of the population. Women, for example, benefit twice as much from a college education as men, and this non-monetary return has slightly increased over time. This may explain, at least partially, the increase in demand for college education over the past 30 years, and the unprecedented rise in the price of college tuition. It is hypothesized that one way in which education works is to change the attitudes, values, and behavior of students. Higher education, for example, makes students more open-minded, tolerant, and risk-averse. Evidence in support of this hypothesis is found by estimating the coefficient of risk (and inequality) aversion. Finally, using subjective well-being data from the European Value Study, the average non-monetary return from higher education is also calculated for Europeans and compared to that in the United States. Although higher education is also found to have a positive effect on happiness in Europe, the non-monetary returns are much larger in the United States. Furthermore, contrary to the United States, the direct effect of education on happiness in Europe is substantial, while the indirect effect is negligible