An Examination of the Effects of Consumption Expenditures on Life Satisfaction in Australia
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An Examination of the Effects of Consumption Expenditures on Life Satisfaction in Australia Fengyu Wu1,2
© Springer Nature B.V. 2019
Abstract This paper studies how consumption expenditures, especially spending on certain types of goods and services, affect people’s life satisfaction. The results demonstrate that conspicuous (i.e., visible and positional) spending increases life satisfaction. The analysis suggests that it is one’s conspicuous consumption expenditures relative to those of other households in one’s reference group that really matter. In contrast, savings and spending on basic goods and services, the less visible components of income, do not contribute to life satisfaction. This paper also evaluates the often-discussed relationship between income and life satisfaction, finding that the relationship is largely driven by conspicuous spending. Evidence of relationship heterogeneity across income groups is presented: conspicuous consumption expenditures have a positive influence on life satisfaction for individuals in all income groups; basic consumption expenditures, however, have a negative influence for people in the lowest income quartile. The findings of this paper underscore the importance of social comparisons to people’s well-being and imply that interdependence should be modeled in utility functions. The results are based on the Arellano–Bond generalized method of moments estimation, which controls for bias from unobserved individual heterogeneity and endogenous variables. The data come from the Household, Income and Labour Dynamics in Australia Survey (2006–2010). Keywords Life satisfaction · Happiness · Subjective well-being · Conspicuous consumption · Social comparison
1 Introduction Social comparison, which refers to the tendency of people to compare their own situations with those of others, has long been considered important in social sciences such as psychology and sociology. However, it has not made substantial inroads into the economics literature because modern economists mostly assume that utility depends on one’s own * Fengyu Wu [email protected] 1
Department of Economics, University of Southern California, Los Angeles, CA 90089, USA
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Present Address: Eudaimonia Institute, Wake Forest University, 2599 Reynolda Road, Winston‑Salem, NC 27106, USA
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consumption, which in turns depends on one’s own wealth. Despite this assumption, the relationship between social comparisons and happiness has been one of the most discussed and debated topics in the literature of subjective well-being (SWB).1 Studies focusing on the link between social comparisons and SWB have mostly investigated the effect of relative income on SWB (e.g., Clark and Oswald 1996; McBride 2001; Ferrer-i-Carbonell 2005). This paper aims to understand social comparisons by looking at the effects of consumption expenditures on life satisfaction2 among the general population of Australia. Specifically, I distinguish between their spending on conspicuous goods and services and spending on basics
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