Working paper
The Marginal Utility of Income.
- Abstract:
- In normative public economics it is crucial to know how fast the marginal utility of income declines as income increases. One needs this parameter for cost-benefit analysis, for optimal taxation and for the (Atkinson) measurement of inequality. We estimate this parameter using four large cross-sectional surveys of subjective happiness and two panel surveys. Altogether, 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. We obtain very similar results from each survey. The highest (absolute) value is 1.34 and the lowest is 1.19, with a combined estimate of 1.26. The results are also very similar for subgroups in the population. We also examine whether these estimates (which are based directly on the scale of reported happiness) 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.
- Publication status:
- Published
- Peer review status:
- Peer reviewed
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(Preview, Version of record, pdf, 375.2KB, Terms of use)
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Authors
- Publisher:
- Centre for Economic Performance, LSE
- Host title:
- CEP Discussion Papers
- Volume:
- 784
- Series:
- CEP Discussion Papers
- Publication date:
- 2007-01-01
- Paper number:
- 784
- Language:
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English
- UUID:
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uuid:030ebbe0-d249-456c-81d8-300132a9d633
- Local pid:
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oai:economics.ouls.ox.ac.uk:11789
- Deposit date:
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2011-08-16
- ARK identifier:
Terms of use
- Copyright holder:
- R Layard, G Mayraz and S Nickell
- Copyright date:
- 2007
- Notes:
- Copyright © 2007 R. Layard, G. Mayraz and S. Nickell. Published by Centre for Economic Performance, London School of Economics and Political Science. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without the prior permission in writing of the publisher nor be issued to the public or circulated in any form other than that in which it is published. Requests for permission to reproduce any article or part of the Working Paper should be sent to the editor at the address: Centre for Economic Performance, London School of Economics and Political Science, Houghton Street, London WC2A 2AE
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