Cookies?
Library Header Image
LSE Research Online LSE Library Services

The marginal utility of income

Layard, Richard, Mayraz, Guy and Nickell, Stephen J (2007) The marginal utility of income. CEPDP, 784. Centre for Economic Performance, London School of Economics and Political Science, London, UK. ISBN 9780853281597

[img]
Preview
PDF
Download (402Kb) | Preview

Abstract

In normative public economics it is crucial to know how fast the marginal utility of income declines as income increases. One needs this parameter for cost-benefit analysis, for optimal taxation and for the (Atkinson) measurement of inequality. We estimate this parameter using four large cross-sectional surveys of subjective happiness and two panel surveys. Altogether, the data cover over 50 countries and time periods between 1972 and 2005. In each of the six very different surveys, using a number of assumptions, we are able to estimate the elasticity of marginal utility with respect to income. We obtain very similar results from each survey. The highest (absolute) value is 1.34 and the lowest is 1.19, with a combined estimate of 1.26. The results are also very similar for subgroups in the population. We also examine whether these estimates (which are based directly on the scale of reported happiness) could be biased upwards if true utility is convex with respect to reported happiness. We find some evidence of such bias, but it is small—yielding a new estimated elasticity of 1.24 for the combined sample.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk
Additional Information: © 2007 the authors
Library of Congress subject classification: H Social Sciences > HV Social pathology. Social and public welfare. Criminology
Journal of Economic Literature Classification System: D - Microeconomics > D6 - Welfare Economics > D61 - Allocative Efficiency; Cost-Benefit Analysis
H - Public Economics > H0 - General > H00 - General
H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency; Optimal Taxation
D - Microeconomics > D1 - Household Behavior and Family Economics
I - Health, Education, and Welfare > I3 - Welfare and Poverty > I31 - General Welfare; Basic Needs; Living Standards; Quality of Life; Happiness
Sets: Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Departments > Economics
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 784
Date Deposited: 21 Jul 2008 13:05
URL: http://eprints.lse.ac.uk/19745/

Actions (login required)

Record administration - authorised staff only Record administration - authorised staff only