The marginal utility of income
By: R. Layard, G. Mayraz and S. Nickell
Contributors: Mayraz, Guy; Nickell, S. J.; London School of Economics and Political Science. Centre for Economic Performance
Series: CEP discussion paper -- no. 784
Publisher: Centre for Economic Performance, London School of Economics and Political Science
Published: 2007
Place of publication: London
Language: eng
Format: [electronic resource] /
Description: In both public economics and welfare analysis 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 cross-sectional surveys of subjective well-being and two panel surveys. Altogether, we use data from over 50 countries, and in a period extending from 1972 to 2005. In all six surveys we find a remarkably consistent relationship between reported well-being and income. We estimate the elasticity of marginal utility with respect to income at around (minus) 1.25. Thus, marginal utility declines somewhat faster than in the case (assumed by Dalton and others) when well-being is linear in log income. In the second part of the paper, however, we ask whether true well-being may not have a convex relationship to reported well-being, making it less concave with respect to income. We find some evidence of this, so that the correct elasticity of marginal utility with respect to income is roughly (minus) 1.15. These figures show that Dalton's theoretical assumption was not far from the truth revealed by empirical evidence, and provide scientific estimates which can be used in all branches of economics applied to public policy.
Notes: Title from publisher's abstract page (viewed on July 6, 2007).

"March 2007."

Includes bibliographical references.

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