Growth, Consumption, and Happiness: Modeling the Easterlin Paradox

Since the 1970s, there has been mounting empirical evidence that after a certain point, income and happiness, or life satisfaction, are not correlated. However, despite the growing empirical evidence, the new dynamic has not been adequately modeled mathematically. To remedy this gap, in this paper, we go through the literature on the relationship between consumption, income, and happiness and provide a novel mathematical model. As we will see, our model can explain all of the empirical nuances encountered by happiness studies and also helps understand the relationship between reported life-satisfaction and other variables like inequality.