The relationship between income and subjective well-being (SWB) is investigatedusing eight waves of the British Household Panel Survey and an estimationstrategy that allows us to relax some assumptions typically made in theliterature. First, we use a random effects generalised ordered probit model toinvestigate whether income effects are heterogeneous across SWB categories, and,second, we discretise (absolute and relative) income variables to allow for theincome effects to vary across income groups. We find that higher absolute incomeincreases SWB but up to a certain level, while low income is significantlycorrelated with low scores in the SWB ladder. Our results are consistent withthe Easterlin Paradox that has been reported in the literature. We find thathigh-income groups are less likely to belong in the highest SWB level, whichcould be partly explained by the fact that the relative income status (ratherthan the absolute one) is more important in determining (the highest level of)SWB.
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