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The Money–Happiness Relationship in Transition Countries: Evidence from Albania

  • Transition Finance, Banking and Currency Research
  • Published:
Transition Studies Review

An Erratum to this article was published on 17 March 2011

Abstract

With an empirical analysis on a panel of individuals living in a transition country (Albania) we document that the impact of money on happiness does not depend only on the pecuniary outcome but also on aspirations and conditions leading to its determination. Additional factors which matter are the self perceived economic status and the share earned from remittances (and, more weakly, from social assistance). By looking at different sides of the phenomenon we find that these factors affect levels, changes in income and the probability of being “frustrated achievers”. Finally, unlike what happens in developed countries, higher income levels are negatively and not positively correlated with the probability of frustrated achievement thereby supporting the hypothesis that individuals in transition countries are not in the upper side of a concave happiness-income relationship.

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Notes

  1. Utility and happiness are not exactly the same concept. But, by definition, something is useful if it enhances our well-being and life satisfaction. Therefore, a straightforward link between utility and happiness may be easily established and such link is conventionally assumed in most of the happiness literature. However, the reflection over this correspondence is still ongoing with some open issues such as those whether self declared life satisfaction: (a) relates to life time or to instantaneous utility; ii) is forward looking incorporating expectations of future happiness changes (a sort of permanent happiness hypothesis). By working on questions which ask people to judge their life satisfaction over a long period we depart from utility/happiness conceptions too related to instantaneous utility, pleasure or momentary affect (Kahneman et al. 2004) and get closer to a lifetime utility concept.

  2. Evidence supporting the paradox is also reported by Blanchflower and Oswald (2004) for the UK, Frey and Stutzer (2002) on a large sample of countries using data from the World Database of Happiness and the US Bureau of Census and Veenhoven (1993) for Japan over the period 1958–1987. In spite of it, the Easterlin paradox is not in itself a regularity always confirmed across countries and time. When Castriota (2006) repeats the Easterlin exercise on Eurobarometer data for some European countries in the last decade he actually finds that the paradox applies to Germany but not to Italy where a quite strong positive relationship between the happiness and per capita income is found.

  3. Arguments on the relevance of the relative income hypothesis are proposed by Duesenberry (1949) and, more recently, by Frank (2005), Layard (2005a, b) and Ferrer-i-Carbonell (2005).

  4. As is well known, interpersonal (and even more intercountry) comparisons based on cardinal indicators are subject to cultural biases, with the latter suffering from language differences in the same definition of happiness [terms such as happiness, glück (German), bonheur (French) and felicità (Italian) have different nuances]. The most recent approach to tackle this problem is that of showing vignettes illustrating a given situation to respondents of different countries and asking them to judge the level of happiness of individual(s) in the picture on the usual cardinal scale (King and Wand 2007).

  5. Equivalised income is commonly used in most economic well-being comparison (within and across countries) studies to adjust income in order to take into account the differences in material needs for families of different sizes. The two main approaches followed are the revealed preferences and the stated level of utility (Schwarze 2003) approach.

    In the first approach differences in scale economies are determined either by actual consumption patterns or by the so-called “expert scales” which are based on expert judgments or political considerations. In our definition of FA we use the OECD scale, developed by Hagenaars et al. (1994), which assign a value of 1 to the household head, of 0.5 to each additional adult member and of 0.3 to each child. Robustness checks with non-equivalised household income and household income equivalised using different scales do not change substantially our findings.

  6. The exact formulation of the question in the GSOEP is as follows “In conclusion, we would like to ask you about your satisfaction with your life in general. How satisfied are you with your life, all things considered?” Please answer according to the following scale:"0" means completely dissatisfied, "10" means completely satisfied.

  7. In 2002, there were 1,782 interviewed individuals (917 urban/863 rural/2 uncoded). The second wave 2003, initially reports information on 2,155 individuals (1,780 interviewed/375 not interviewed). The majority of failures to obtain a second interview were due to split-off moves out of the country (N = 348). Other 23 individuals had moved out of scope within Albania (in places where they refused or were not in condition to answer). Only four households had moved and could not be traced. 83 households had moved and were traced to their new addresses.

  8. World Bank report on Albania underlines that “Migration is perhaps the single most important political, social, and economic phenomena in post-communist Albania”. The report calculates that around one-fifth of the total population left the country since 1990 and that large-scale internal migration movements occurred from rural to urban areas. Remittances are calculated to be the main source of foreign exchange (larger than the sum of export and foreign direct investment) and amounted to 14% of GDP in 2003 (World Bank 2003).

  9. We focus on weak and not on strong frustrated achievement given that the latter presents a small share of positive cases for our logit estimate. We could equally define weak frustrated achievement as non-happiness increasing achievement but we maintain the traditional denomination for simplicity.

  10. Even though we cannot completely rule out the possibility of reverse causation, we argue that the hypothesis is more unlikely for the remittance share variable. In this case in fact, if we do not believe in an almost deterministic genetic transmission, it is hard to imagine that the happiness reaction to income changes of the interviewed individuals could affect the earning capacity of a migrant relative.

  11. For a recent discussion on the age-happiness puzzle see Frijters and Beatton (2008).

  12. To make an example, with an 80/20 distribution of random head/tail probabilities, the player strategy is “head” and the expected value of playing one penny is 4/5. By changing the distribution to 60/40 the player strategy remains “head” but the expected value falls to 3/5. An equal outcome produces higher happiness in the second than in the first case. If we assume that self perceived economic status is strictly related to income expectations, this result parallels our empirical one.

  13. Another formulation of the anti-consequentialist principle is the well known definition of procedural utility (Frey et al. 2004) defined by the authors as “the well-being people gain from living and acting under institutionalised processes as they contribute to a positive sense of self, addressing innate needs of autonomy, relatedness and competence”. In such case non-exclusive care for one’s own payoff does not depend on other regarding preferences but on the modalities which led to the final outcome. In our case it depends both on other regarding preferences and on the specific modalities leading to the outcome.

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  1. Faculty of Economics, Tor Vergata University, Rome, Italy

    Leonardo Becchetti

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  1. Leonardo Becchetti
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Correspondence to Leonardo Becchetti.

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An erratum to this article can be found at http://dx.doi.org/10.1007/s11300-011-0194-2

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Becchetti, L. The Money–Happiness Relationship in Transition Countries: Evidence from Albania. Transit Stud Rev 17, 39–62 (2010). https://doi.org/10.1007/s11300-010-0135-5

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  • DOI: https://doi.org/10.1007/s11300-010-0135-5

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