This paper examines whether people adapt to poverty over time and whether past experiences of poverty and unhappiness influence current poverty and happiness levels. It uses longitudinal data from the German Socio-Economic Panel from 1992 to 2010. The study finds that individuals adapt to poverty such that fluctuations in poverty are no worse than being poor consistently. Additionally, past short-lived unhappiness is found to promote current poverty. The paper uses a bivariate probit model with increasing lags to control for initial conditions and relates poverty and happiness dynamically over time.

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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

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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);

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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