Life cycle welfare: evidence and conjecture
Abstract At a point in time subjective well-being is positively related to income; over the life course subjective well-being is constant despite substantial growth in income. This paradox is explained by new evidence on consumption aspirations. At a point in time aspirations vary fairly little by income level; over the life cycle, aspirations increase about in proportion to income. These shifts in aspirations also affect assessments of past and future well-being in such a way that the choices underlying behavior (based on what psychologists call “decision utility”) turn out not to have their expected welfare effects (experienced utility). Of the two influences shaping consumption aspirations – comparisons with others and with one’s past experience – the former appears more salient early in the life cycle and the latter, later on.