October 2004

IZA DP No. 1339: Heterogeneity in Reported Well-Being: Evidence from Twelve European Countries

published in: Economic Journal, 2005, 115 (502), C118-C132

This paper models the relationship between income and reported well-being using latent class techniques applied to panel data from twelve European countries. Introducing both intercept and slope heterogeneity into this relationship, we strongly reject the hypothesis that individuals transform income into well-being in the same way. We show that both individual characteristics and country of residence are strong predictors of the four classes we identify. We expect that differences in the marginal effect of income on well-being across classes will be reflected in both behaviour and preferences for redistribution.