Adaptation and Loss Aversion in the Relationship between GDP and Subjective Well-being

Abstract

We examine the roles of adaptation and loss aversion in the relationship between national income and subjective well-being. Earlier studies have found that people and nations tend to adapt to changes in income, and that well-being is more sensitive to income losses than to income gains. We apply a model which allows for both adaptation and asymmetries to cross-country panel data. We find evidence for both short-run and long-run loss aversion. Asymmetry becomes more important over time because the effects of income increases become statistically insignificant, whereas the effects of income decreases are significant and large also in the long run.