The Impact of Income Inequality on Individual Happiness: Evidence from China

Using survey data from China, this paper tests the association between individual self-reported happiness and income inequality. The hypothesized relationship between income inequality and individual happiness is an inverted-U shaped association based on the tunnel effect theory proposed by Hirschman and Rothschild (Q J Econ 87(4):544–566, 1973). Using the Chinese General Social Survey data, we empirically investigate the relationship between income inequality and individual happiness and we find evidence confirming the tunnel effect hypothesis. Specifically, individual happiness increases with inequality when county-level inequality measured by the Gini coefficient is less than 0.405, and decreases with inequality for larger values of the Gini coefficient, where approximately 60 % of the counties in the study have a Gini coefficient larger than 0.405. The inverted U-shaped association exists in both urban and rural China; however, the turning points for urban and rural areas are 0.323 and 0.459, respectively. Between the rich and poor groups, the inverted-U shape relationship exists only in the poor subsample.