Heterogeneity in the relationship between income and happiness: A conceptual-referent-theory explanation

This paper puts forward a new explanation to the general finding of a weak relationship between income and happiness; which is based oil the conceptual-referent theory of happiness (CRT). CRT studies what conceptual referent for happiness a person has in mind when making a judgment about tier happiness. The theory states that the subjective evaluation of life as a whole is influenced by a person's notion of what a happy life is. The theory stresses the importance of heterogeneity; this is: the conceptual referent is not the same for everybody. The paper shows that heterogeneity in the conceptual referent also extends to the relationship between happiness and income. Income is an important explanatory variable for some people, while for others it is completely irrelevant; and this depends on the conceptual referent for happiness a person holds. The existence of heterogeneity in the conceptual referent for happiness and, consequently, in the explanatory structure of happiness has important implications for behavioural economics. Happiness pursuing persons are expected to behave differently if they have different notions of what a happy life is. The empirical analysis is based on a large database from Mexico. (c) 2005 Elsevier B.V. All rights reserved.