Andrew Clark , Paul Frijters and Michael A. Shields (Ecole Normale Superieure (ENS) – Department and Laboratory of Applied and Theoretical Economics (DELTA) , Queensland University of Technology – School of Economics and Finance and University of Melbourne – Department of Economics ) have posted Relative Income, Happiness and Utility: An Explanation for the Easterlin Paradox and Other Puzzles on SSRN. Here is the abstract:
The well-known Easterlin paradox points out that average happiness has remained constant over time despite sharp rises in GNP per head. At the same time, a micro literature has typically found positive correlations between individual income and individual measures of subjective well being. This paper suggests that these two findings are consistent with the presence of relative income terms in the utility function. Income may be evaluated relative to others (social comparison) or to oneself in the past (habituation). We review the evidence on relative income from the subjective well-being literature. We also discuss the relation (or not) between happiness and utility and discuss some non-happiness research (behavioural, experimental, neurological) dealing with income comparisons. We last consider how relative income in the utility function affects economic models of behaviour in a number of different domains.
I thought this paper was quite good, but I must admit to some frustration with the happiness literature in general and this paper in particular. Don’t we need some theory or account of happiness in order to determine whether we are measuring it? Isn’t some argument needed for the idea that well being is or even could be subjective? Section four of this paper is particularly difficult in this regard–with a lack of analytic clarity in exposition that makes it claims particularly difficult to assess. The authors seem to assume that "happiness" could be a measure of utility–a possibility that is likely to strike many normative theorists as bizzare.
All that said, highly recommended.