Essays in Happiness Economics Boris Nikolaev University of South Florida, [email protected]
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University of South Florida Scholar Commons Graduate Theses and Dissertations Graduate School January 2013 Essays in Happiness Economics Boris Nikolaev University of South Florida, [email protected] Follow this and additional works at: http://scholarcommons.usf.edu/etd Part of the Economics Commons Scholar Commons Citation Nikolaev, Boris, "Essays in Happiness Economics" (2013). Graduate Theses and Dissertations. http://scholarcommons.usf.edu/etd/4735 This Dissertation is brought to you for free and open access by the Graduate School at Scholar Commons. It has been accepted for inclusion in Graduate Theses and Dissertations by an authorized administrator of Scholar Commons. For more information, please contact [email protected]. Essays in Happiness Economics by Boris Nikolaev A dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy Department of Economics College of Arts and Sciences University of South Florida Major Professor: Philip Porter, Ph.D. Michael Loewy, Ph.D. Andrei Barbos, Ph.D. Terry Sincich, Ph.D. Date of Approval: July 3, 2013 Keywords: income inequality, economic growth, subjective well-being, returns to education, social welfare Copyright c 2013, Boris N. Nikolaev Dedication To my grandparents Acknowledgments When I first started working on this dissertation, over three years ago, I had no idea what I was about to undertake. People often describe the process as a journey, although, in my opinion, it is more like a quest { you neither know where you are going to start nor where you are going to finish, if you ever do. This quest has taught me more about myself and less about economics, and, most importantly, it is not over yet. Many people along the way have contributed to my work { some of them directly with advice, and others with their warm support. I am grateful to all of you for your kindness. First, I would like to express my deepest gratitude to my major professor Philip Porter who, over the past several years, has given me enough insights to write several dissertations. He has been more than a dissertation adviser to me, and his true mentorship, friendship, stories, advice, humor, and encouragement will be something that will carry over with me for life { as an economist, as a teacher, and, mostly, as a person. I am indebted to his humility, open-mindedness, and willingness to let me pursue topics in the new and still not universally accepted field of happiness economics ... and for the occasional fishing trip. Phil, I am pretty sure that the completion of my dissertation will break the spell on your boat, so you will finally be able to catch a tarpon! I am also grateful for the support of the other members of my dissertation com- mittee { Dr. Michael Loewy, Dr. Andrei Barbos, and Dr. Terry Sincich. Five years ago, Professor Sincich showed me that even a technical subject like statistics can be taught in a fun and exciting way, and his example as a teacher has inspired me to excel in the classroom and later be recognized for it. Up to this day, I finish my courses with a game of Jeopardy, although I still haven't seen the actual show. As my graduate adviser, Professor Loewy has directed me through the program with rigor and competence. He has been immaculate, punctual, and strict, which has pushed me to show the best of myself. I am especially thankful to Emeritus Professor Donald Bellante who has helped my career and intellectual development in numerous ways. Ironically, I received the only B in the PhD program for his History of Economic Thought class, which is also the class that I find the dearest and most important in the whole curriculum. Life, however, works in strange ways. He was the reason I ended up going to Duke University to study the History of Economic Thought in the summer of 2010, and I am now regularly teaching the course myself. I would also like to thank the rest of the Economics Department for the continuous support over the course of my studies at USF. Special thanks go to the administrative staff { Diana Reese and Mary Bennett { who saved me countless nights of paperwork and headaches. Of course, I am also grateful for the many friends and colleagues that I met at USF. These friendships made the hard moments half as hard and the good moments twice as good. I am also indebted to the Institute for Humane Studies and the USF Graduate School for the generous research support in the past couple of years which really made a difference in the quality of my writing. As my good friend F.L. Wright likes to say, \writing is rewriting," and their support has allowed me to follow his advice and polish and improve my work. I am especially grateful to my IHS mentor Joshua Hall, whose support and direction has made a huge difference in my career development and thinking. I also have to express my deepest gratitude for my undergraduate professor Brian Peterson. Although I was a chemistry and biology major in college, Principles of Microeconomics with Brian was my favorite class. One day he innocently mentioned to me that I should consider majoring in economics. This changed the course of my life. It wasn't until years later that I found out that this remark was part of a university wide conspiracy meant to increase enrollment in his classes. Nevertheless, I couldn't be happier with my choice. I am also intellectually indebted to Steve Naragon. Thank you for teaching me how to think. I now occasionally do it. And, perhaps more importantly, thank you for teaching me the virtues of humility, patience, courage, endurance, and humor. I am now very patient with my humor...and I have the endurance to do it. My sincere thanks go to my dear Kelley Russell and her lovely family { Marla and Rick and Michael and Mary { who over the past couple of years made me feel at home and gave me much warmth and emotional support that carried over into my work. As it always happens, it was in a Publix parking lot and on a back of an envelope from a card that Kelley's mom had just sent me that I jotted down the details that later became the first essay from my dissertation. I would have never been able to finish this dissertation if it wasn't for the sup- port of my sister Maria and her husband Paul. Thank you for believing in me and for supporting me in any possible way all of these years. And for making me feel occasionally that I am part of a Hollywood movie. I used to think that knowledge is found in books, but you have taught me that the most important knowledge in life cannot be taught. You were right. I would also like to thank my best friends from back home who stuck with me over the years { Miro, Doncho, Oto, Boyan, and Ivaka. And my Tampa friends { Rachel, Vikzen, Khalito, Stefko, Bob Sanders, and Pluto. I am sorry that work and school kept me away from some of the most precious moments in your lives, but some of the most precious moments in my life are because of you. Most of all, I would like to thank my family back home. They are the reason why I have been able to accomplish this. I love all of you dearly and my accomplishments are as much yours as mine. Table of Contents List of Tables vi List of Figures viii Abstract ix 1 The Economics of Happiness1 1.1 Introduction..................................2 1.2 Decision vs Experienced Utility.......................4 1.3 The Multi-Dimensional Nature of Happiness................6 1.4 Measuring Subjective Well-Being......................7 1.5 How Reliable Is Happiness Data?......................9 1.6 Methodological Issues............................. 11 1.7 What Can Happiness Research Teach Us?................. 13 1.8 Alternative Approaches............................ 17 1.9 Conclusion................................... 18 2 Income Inequality and Economic Growth { Are Americans Better Off? 19 2.1 Introduction.................................. 19 2.2 Theoretical Considerations.......................... 22 2.2.1 Economic Growth and Happiness.................. 22 2.2.1.1 The Income-Happiness Paradox.............. 22 i 2.2.1.2 Income Comparisons and Adaptation........... 24 2.2.1.3 The Importance of Absolute Income........... 25 2.2.1.4 Inequality Aversion..................... 27 2.2.2 The Price of Inequality........................ 29 2.2.2.1 Positional Arm Races................... 29 2.2.2.2 Deterioration of Mental and Physical Health....... 31 2.2.2.3 Corrosion of Social Capital................ 32 2.2.2.4 Political Inequality and Democracy............ 33 2.2.3 The Trade-off Between Equality and Efficiency........... 35 2.3 Data...................................... 37 2.3.1 Subjective Well-Being........................ 38 2.3.2 Income Inequality........................... 38 2.3.3 Personal Income............................ 39 2.3.4 Background Variables......................... 39 2.3.5 Other Variables............................ 39 2.4 Model and Empirical Strategy........................ 39 2.4.1 Theoretical Model.......................... 40 2.4.2 Estimating the Parameter of Inequality Aversion " ........ 45 2.4.3 Calculating A("), ξ("), and W("), 1974-2010............ 48 2.5 Estimating the Indirect Costs of Inequality................. 49 2.5.1 Empirical Model........................... 49 2.5.2 Empirical Results........................... 51 2.5.3 Robustness Test............................ 54 2.6 Calculating the Net Benefit......................... 55 2.6.1 Calculating the Marginal Rate of Substitution........... 55 2.6.2 Accounting for the Trade-off..................... 57 2.6.3 Decomposing the Effect by Each Income Quintile......... 58 ii 2.7 Conclusion................................... 59 2.8 Appendix................................... 61 3 Estimating the Non-monetary Returns from Higher Education 83 3.1 Introduction.................................