Discussion Papers, Center for European Governance and Economic Development Research 155
The past literature found evidence for the presence of endogeneity issues due to individuals' heterogeneity and omitted time-varying variables in the relationship between income and life satisfaction on the micro-level for the UK (Powdthavee (2010)). The aim of the present contribution is to put these results in a broader context and to investigate the role of cross-country heterogeneity and income endogeneity in estimations on life satisfaction for sub-samples of advanced, developing and transition countries. The paper is innovative in merging this methodology with a multi-country setting, particularly considering transition and developing countries. Instrumenting for income, we find that cross-country heterogeneity is associated with a significantly lower estimate for the income effect, whereas controlling for endogeneity bias delivers significantly higher estimates. This points to a negative bias in the OLS estimate, and thus approves previous literature's findings. Capturing endogeneity appears to be essential in studies on life satisfaction. The negative bias apparently is highest for the sub-sample of transition countries and lowest for advanced countries. Most of the macro- and micro-level impacts are in line with the previous literature.