Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/75399 
Year of Publication: 
2013
Series/Report no.: 
SOEPpapers on Multidisciplinary Panel Data Research No. 560
Publisher: 
Deutsches Institut für Wirtschaftsforschung (DIW), Berlin
Abstract: 
We study the effect of real versus nominal income on life satisfaction. According to economic theory real income, i.e., nominal income adjusted for purchasing power, should be the relevant source of life satisfaction. Previous work, however, has only studied the impact of nominal income. We use a novel data set comprising about 7 million data points that are used to construct a price level for each of the about 400 administrative districts in Germany. We estimate a fixed effects model that controls for individual and local heterogeneity other than the price level. Our results show that higher price levels significantly reduce life satisfaction for individuals in the four lowest deciles of the income distribution. Furthermore, our findings suggest that people do not perceive money as neutral: the loss in life satisfaction caused by a higher price level is much larger than the loss in life satisfaction induced by a corresponding decrease in nominal income. Our results provide an argument in favor of regional indexation of government transfer payments such as social welfare benefits.
Subjects: 
life satisfaction
price index
neutrality of money
redistribution
JEL: 
D60
C23
D31
Document Type: 
Working Paper

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