An analysis of life satisfaction in Albania: An heteroscedastic ordered probit model approach

This paper uses the nationally representative Albanian Living Standards Measurement Study survey from 2005 to investigate the determinants of life satisfaction. In common with much of the existing empirical literature that models life satisfaction (or subjective well-being) this paper exploits an ordered probit model. In contrast to the existing literature, however, the current study places an important emphasis on regression model evaluation. Diagnostic testing revealed a number of econometric model deficiencies but the explicit incorporation of a variance function into the ordered probit model resolved all detected problems. The tenor of the key findings generally reflects that found in the literature on the determinants of life satisfaction for both advanced capitalist and transitional economies. However, a number of additional themes with a strong Albanian dimension were interrogated. In particular, our study revealed evidence of long memories among Albanian respondents with respect to the collapse of that country's notorious pyramid schemes and the scarring effects of the episode continue to impact on life satisfaction even with the passage of almost eight years. A sizeable effect for communal level criminal activity on life satisfaction was also detected. In addition, our econometric estimates also provided some empirical insights on the monetary value of friendship and the costs of children.

Research highlights
► In our application, a SWB ordered probit violates several underlying assumptions.
► We model heteroscedasticity and find its determinants.
► This modelling restores all the ordered probit's underlying assumptions.
► We calculate the monetary value of moving up in happiness, of a friend and a child in Albania.