Local happiness and firm behavior: Do firms in happy places invest more?

• Local happiness is correlated with higher levels of firm investment and R&D in particular controlling for firm and local area characteristics.
• The role of local happiness is greater in places where happiness is more equally distributed.
• The results are more important for R&D investment and for younger firms.
• The results are robust to a number of alternative specifications such as the inclusion of residual happiness levels, the use of hedonic well-being measures, relocated firms, and testing for reverse causality.

We examine a previously unexplored relationship between local happiness and firm investment. We looked at investment in general and R&D intensity in particular, as the relatively intangible nature of the latter may make it more subject to the effects of sentiment and affect. We find that average local happiness is positively correlated with both R&D intensity and firm investment, after controlling for firm and local area characteristics. This positive relationship may be due to the optimism and longer term perspectives that are typically associated with higher levels of life satisfaction/happiness. We also look at inequality in happiness levels and find that the effect of local happiness is stronger in places with more equal happiness distributions. Younger firms’ investment behavior is also more strongly correlated with local happiness levels. The results remain robust to a battery of robustness tests including the use of residual and hedonic measures of happiness, analysis of a sample of relocated firms, and a test for reverse causality.