Money Does Matter! Evidence from Increasing Real Income and Life Satisfaction in East Germany Following Reunification
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- 1 May 2004
- journal article
- Published by American Economic Association in American Economic Review
- Vol. 94 (3) , 730-740
- https://doi.org/10.1257/0002828041464551
Abstract
In this paper we investigate how life satisfaction is affected by a substantial increase in real income. Our context is East Germany in the decade following reunification. We implement a new fixed- effect estimator for ordinal life satisfaction and develop a decomposition approach that accounts for new entrants and panel attrition. Using data from the German Socio-Economic Panel, we find that average life satisfaction in East Germany increased by around 20 percent between 1991 and 2001, leading to a clear convergence with West Germany. Importantly, increased real household incomes in East Germany accounted for approximately 35-40 percent of this increase, which corresponds to the economists' view that money does matter.Keywords
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