Does Happiness Adapt to Increase in Income? Evidence fromPakistan Socio-economic Survey (1998-2001)

The fact that happiness does not increase as income increasesover time [the Easterlin Paradox (1974)] has puzzled a number ofscholars for a number of decades. The latest research on this topic[Easterlin, et al. (2010)] concludes that happiness increases with anincrement in income in the short term but it adapts to this incomeincrement in the long term. The objective of this research is to testwhether happiness adapts to income increase in the short term usingtwo-period panel Pakistan Socio-Economic Survey [PSES (1998-2001)]. Thepaper makes use of a unique question on happiness asked in PSES toresolve two issues simultaneously: unavailability of happiness questionin period 1 and potential inconsistency of responses to generalhappiness question. The paper applies Random Effect Ordered Probit modelto investigate the hedonic adaptation effect using various formulationsused in the happiness economics literature. The results show positiveand statistically significant impact of income change on happiness withweak evidence of adaptation to income since it is statisticallyinsignificant. The result is consistent with the studies that show noadaptation during a short period. Among several reasons for hedonicadaptation, falling positive emotions and rising aspirations arediscussed along with causes of happiness and policy implications. Thesignificance of the present research lies in the fact that it is thefirst study in Pakistan that tests the hedonic adaptation to income andhence contributes to the evidence on happiness dynamics. JELClassification: I31, D60, C25 Keywords: Happiness, Adaptation, Income,Panel Ordered Probit Model