Parallel Session IARIW 2014

1. 1
Does Happiness adapt to Poverty? And
Poverty to Happiness
Sara Ayllon
Presented by: Stephan Klasen
University of Göttingen
August 25, 2014
IARIW General Conference 2014

2. 2
What the paper is about
• Motivation:
– Feed-back loop poverty-unhappiness; poverty makes
you unhappy, unhappiness promotes poverty;
– Do people adapt to poverty (stop being unhappy),
does the penalty of unhappiness fade over time?
– Uses long-term panel data and several past spells of
poverty and unhappiness;
• Key Findings:
– Finds individuals adapt to poverty over time;
– Fluctuations in poverty no worse than being poor all
the time;
– Past (short-lived) unhappiness promotes poverty;

3. 3
Methods and Data
• Data: German Socio-Economic Panel 1992-2010
– Individual-level data of all adults;
– Usual relative poverty measure (new OECD scales, cash
income including imputed rent),
– Dichotomizes happiness (unhappy<5), 9% unhappy;
• Method:
– Bivariate Probit with increasing lags;
– Control for initial conditions problem (Wooldridge, 2005);

5. 5

6. 6

7. Comments
• Nice paper on an important subject;
• Innovative and real contrbution to the literature;
• Methods:
– ‚Magic‘ of identification of bivariate probit (by functional form);
– Throw away information through dichtotomization of happiness:
• plus arbitrary cut-off at 5 seems problematic, robustness check
needed;
• also dichotomization of poverty?);
• Alternative:
– Simultaneous equation system (with income and happiness
scale);
– IV approach;
– Identify via shocks to happiness (e.g. death, health shock?);
• Report other covariates, and possible interactions, and
transmission channels (esp. labor market)? 7