Balanced Growth : A Potential Resolution to the Easterlin Paradox

This paper develops a theory to explain the Easterlin Paradox, which holds that average happiness levels do not necessarily increase as countries grow wealthier, by analyzing the different roles of income and non-income factors in promoting happiness. Our theory shows that happiness rises with income only up to a critical point that is determined by the amount of non-income factors. Once the critical income level is achieved, increased income no longer buys more happiness, and so the only way to promote happiness is to improve non-income factors. As a policy implication, governments should promote balanced growth between income and non-income factors to maintain sustained happiness. The empirical analysis provides evidence supporting our theoretical predictions