Does the Risk of Poverty Reduce Happiness?

We investigate the unexplored link between the risk of poverty and happiness in the context of a developing country. Using unique longitudinal data, we estimate workers' vulnerability to income-poverty and find a strong negative relationship between vulnerability and happiness, over and above a positive income effect. The result is robust and cannot be reduced to the effect of two-sided uncertainty. A matched behavioural experiment shows that respondents are significantly loss-averse. We conclude that downside risk is an important determinant of happiness and of economic decisions under uncertainty. Policies that mitigate downward risk may thus have direct impacts on both well-being and efficiency