# **1. Introduction**

Subjective measures of welfare are widely used in psychological and social sciences, including economics.<sup>2</sup> Typically a survey respondent is asked to rate their “economic welfare,” “satisfaction with life” or “happiness” on an ordinal scale, sometimes referred to as a Cantril ladder following Cantril (1965).<sup>3</sup> A large literature has studied the covariates of answers to such subjective welfare questions.<sup>4</sup> The most common method is a regression (typically an ordered probit) of the survey responses on individual and household characteristics, including age, gender, income, education, employment status and household demographics. Such regressions have been used to assess the welfare effects of, _inter alia,_ own income (“does money buy you happiness?”), employment (“does unemployment lower welfare at given income?”) and relative position (“do people care about relative deprivation?”).

Measurement problems clearly confound interpersonal comparisons of welfare using subjective data (as they do with objective data). A long standing concern about subjective welfare (and health) questions is that different people may use different criteria for scaling their welfare—that they have different ideas about what it means to be “rich” or “poor,” or what it means to be “satisfied” or not with one’s life.<sup>5</sup> Such latent heterogeneity in scales has often been seen as invalidating the use of subjective welfare questions for inferring utility.<sup>6</sup> This recognizes explicitly that latent heterogeneity in factors that are essentially irrelevant to welfare but influence responses to subjective welfare questions casts doubt on the implied interpersonal comparisons of welfare from a subjective measure. In these circumstances, heterogeneity in

> 2 A cross-country compendium of the questions asked and a summary of the answers can be found in Veenhoven et al. (1993). The literature in economics is reviewed by Di Tella and MacCulloch (2006). The psychological literature on subjective welfare is reviewed in Diener et al. (1999) and Furnham and Argyle (1998). Since 2000, a scholarly journal has been devoted to the scientific study of subjective welfare, namely the _Journal of Happiness Studies_ .

> 3 An alternative approach is to ask what level of income is needed to attain a given position on a Cantril ladder, such as not being “poor.” This is the “Leyden method” devised by van Praag (1968). While we do not use this type of data here, the same concerns about bias arise in the Leyden method.

> 4 Examples include van Praag (1968), van de Stadt et al. (1985), Clark and Oswald (1994, 1996), Kapteyn et al. (1998), Easterlin (1995), Oswald (1997), Winkelmann and Winkelmann (1998), Pradhan and Ravallion (2000), McBride (2001), Ravallion and Lokshin (2001, 2002, 2009) Senik (2004),  Luttmer (2005), Ferrer-i-Carbonell (2005) and Fafchamps and Shilpi (2009). 5

While this paper focuses on heterogeneity in scales, there are other concerns. For example, Conti and Pudney (2008) find that minor re-designs in questions on satisfaction of life/work led to large changes in answers, particularly for women. Moreover, they conclude that these distortions in survey responses influence research findings with respect to understanding women’s job satisfaction. 6 For a recent discussion, see Di Tella and MacCulloch (2006).

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