Prozac for Depressed States? Effect of Mood on Local Economic Recessions

This paper examines whether people's mood and optimism affects economic activity. We consider two sets of exogenous proxies for optimism that are unrelated to the economic environment: (i) weather (average temperature and cloud cover) and (ii) sports and political optimism. We show that economic recessions are weaker, expansions are stronger, and the economic recovery is faster in U.S. states where local individuals are more optimistic. Further, local optimism has a stronger impact on state-level business cycles of smaller states and regions with low levels of risk sharing. In contrast, the incremental effects of local optimism are weaker in states where people are younger, more educated and sophisticated, and socially more connected. States with larger concentration of minority and urban population also exhibit lower sensitivity to variations in mood and optimism. Alternative explanations based on state's industrial composition, tax environment, migration, seasonal affective disorder (SAD), oil shocks, and direct economic impact of weather cannot explain these findings