The Rich, The Poor and The Satisfied: An Econometric Approach to assess Determinants of Individual Well-Being and Robustness of GDP as a measure of Aggregate Welfare

Abstract

Following the extensive literature showing that GDP lacks in incorporating several aspects of human life that influence individual well-being and thus the aggregate country welfare, this research contributes specifically to enrich the studies based on a subjective approach. The analysis starts by presenting a latent regression model in which individuals are assumed to derive their well-being, represented by life satisfaction, from a set of personal and country variables. By means of the integrated WVS-EVS, a multi-temporal and worldwide dataset with more than 300,000 observations of subjective measure of well-being, this research sheds light on the relations between determinants of well-being and life satisfaction. These relations are estimated through an ordered probit model. There are two main findings of the research: first, consumption, wealth, health, environment, inequality, leisure time, country growth, education and unemployment contribute to shape the welfare differently according to macroareas; second, when predicted values of the ordered probit are compared with GDP, it is proven that GDP is not a robust measure to rank countries according to individuals’ subjective well-being. This research ends with proposing an innovative method to rank countries according to the probability of their citizens being satisfied with their life.