This paper contributes to the literature on subjective well-being (SWB) by taking into account different aspects of life, called domains, such as health, financial situation, job, leisure, housing, and environment. We postulate a two-layer model where individual total SWB depends on the different subjective domain satisfactions. A distinction is made between long-term and short-term effects. The individual domain satisfactions depend on objectively measurable variables, such as income. The model is estimated using a large German panel data set.
The recent issue of this journal, devoted to the theme of ‘Subjective well-being and economic analysis’, may be seen as a significant step towards the lifting of the virtual ban on measuring utility that has dominated economics since Robbins (1932). To be honest, it should be noted that various prominent economists, such as Frisch (1932) and Tinbergen (1991) always refused to take such a stand. Van Praag (1968), Easterlin (2001), and Holländer (2001) a.o. make a strong case that this anathema has actually caused a stagnation in the development of economic analysis.
In the last decade, but prior to the work published in JEBO, scattered economists have started to study subjective well-being (SWB) 1 as a serious subject. See, for example, Clark and Oswald (1994), Di Tella et al. (2001), Frey and Stutzer (2000), McBride (2001), Oswald (1997), Pradhan and Ravallion (2000), and Van Praag and Frijters (1999). Earlier studies include Easterlin (1974), Van Praag (1971), and Van Praag and Kapteyn (1973).
This paper extends this line of research by making a first attempt to develop a joint model based on satisfaction with life as a whole and on domain satisfactions. Domain satisfactions relate to individual satisfaction with different domains of life, such as health, financial situation, and job. Satisfaction with life as a whole can be seen as an aggregate concept, which can be unfolded into its domain components.
Most studies in this literature have the following structure. Individuals are asked how satisfied they are with their life as a whole or with a specific domain of it. They are invited to cast their response in terms of a small number of verbal response categories, such as ‘dissatisfied’, and ‘very satisfied’. Alternatively, the categories are numbered from 0 or 1 to 5, 7 or 10, where ‘most dissatisfied’ corresponds to level 0 or 1 and ‘most satisfied’ with the highest level. The responses are explained by ordered probit or logit models, using objective variables, such as age, income, gender, and education. When two respondents give the same answer, they are assumed to enjoy similar satisfaction levels, implying that ordinal comparability is permitted. In other words, ordinal interpersonal comparability is a basic assumption in these models. Next, the effect of the explanatory variables on individual well-being can be assessed. Additionally, one can also consider the substitution ratio between explanatory variables.2 This paper aims at a somewhat more sophisticated model in which we will assume that satisfaction with life is an aggregate of various domain satisfactions.
This paper is structured as follows. Section 2 presents the model and the estimation procedure. Section 3 describes briefly the data, introduces the satisfaction questions used in the empirical analysis, and highlights the main underlying assumptions. Section 4 shows and discusses the estimation results. Section 5 concludes.
In this paper, we have made an attempt to measure the individual’s domain and overall satisfactions and the way in which they are connected. We have postulated a simultaneous equation model, where GS is explained by the values of the satisfactions with respect to six distinct domains of life. We showed that it is possible to estimate a model for subjective satisfactions in the spirit of traditional econometric modeling, even though the qualitative variables are not measurable in the usual sense.
The main conclusions of this paper are:
1.
Given the fact that we get stable significant and intuitively interpretable results, the conclusion seems justified that the assumption of interpersonal ordinal comparability of satisfactions cannot be rejected.
2.
It is possible to explain domain satisfactions to a large extent by objectively measurable variables. Domain satisfactions are strongly interrelated because of common explanatory variables.
3.
GS may be seen as an aggregate of the six domain satisfactions.
Obviously, this study is a first step that has to be validated on other data. Moreover, it is easy to think of a number of refinements. Nevertheless, we believe that there is ample evidence that the answers to subjective questions can be used as proxies for measuring individual satisfaction, happiness, or well-being. The consequence is that self-reported satisfaction is a useful new instrument for the evaluation and design of socio-economic policy. Moreover, the results help us to understand the composite construction of individual well-being and preferences.
Another application of this model is to assess trade-off ratios between, e.g. leisure, environment or health, and income. Such ratios have been calculated by, for instance, Di Tella et al. (2001), Ferrer-i-Carbonell and Van Praag (2002), and Van Praag and Baarsma (2000). This is left for future research. It will be clear that this model is a major potential playground for future research for economists, psychologists, and political scientists.
