Adaptation and loss aversion in the relationship between GDP and subjective well-being

Abstract

We examine the roles of macro-level adaptation - including social comparison effects becoming more important over time - and macroeconomic loss aversion in the time-series relationship between national income and subjective well-being. Models allowing for these phenomena are applied to crosscountry panel data. We find evidence for macroeconomic loss aversion that becomes more important over time: the effects of economic growth become small and statistically insignificant in the long run, whereas the effects of contractions are large and long-lasting. The results are consistent with the Easterlin paradox and point to it being explained by macro-level adaptation to economic growth. Our results highlight the importance of allowing for both dynamics to distinguish longrun from short-run effects and asymmetries to recognize the important effects of contractions. Failing to do the former leads to a misleading impression of the longrun relationship between economic growth and well-being.