Consumption Comparisons and Happiness: A Calibration Study

Does it make us unhappier when we compare our consumption with that of the Joneses or our own past achievements? This paper tries an answer by bringing together two disparate literatures: the macro (growth) theory on habit formation and the applied literature related to the Easterlin paradox. Using the association of happiness and family income in the U.S. it calibrates a simple model of economic growth and estimates how much individual welfare (happiness) is affected by unexpected losses (e.g. following a financial crises) and gains of wealth. The results are compared with those obtained for a counterfactual economy where everything is the same besides that consumers are not comparing their achievements. Avoiding interpersonal utility comparisons, it is shown that positive and negative shocks affect welfare not markedly differently in both economies. The hypothesis that the comparing attitude as such makes people markedly unhappier is thus rejected.