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CEP discussion paper
A Step towards Valuing Utility the Marginal and Cardinal Way
Paul Dolan, Daniel Fujiwara and Robert Metcalfe
July 2011
Paper No' CEPDP1062:
Full Paper (pdf)

JEL Classification: A10; D6; D61; H41; I31

Tags: subjective well-being; utility; happiness; multicollinearity; income; non-market goods

Income has a direct impact on our utility as well as an indirect impact through the goods, services and life events it allows us to purchase. The indirect effect of income is not properly accounted for in existing research that uses measures of cardinal utility for economic analysis. We propose a new approach for appropriately attributing the full effects of income on utility and we show the implications of our approach using a longitudinal dataset that contains reports of subjective wellbeing (SWB). We show that income has a much greater effect on SWB when indirect effects are considered. These results have important implications for how we value the marginal benefits of non-market goods and we explore some of these issues in the paper