Dynamics of adolescents' life satisfaction and effect of class rank percentile: Evidence from Korean panel data

•Individual heterogeneity and state dependence are simultaneously considered in dynamic ordered probit models.•Strong positive state dependence in adolescents' life satisfaction is empirically observed.•Individual heterogeneity accounts for 31% of the unexplained variation in life satisfaction.•Transitory and permanent income shocks have insignificant effects on life satisfaction.•A meaningful gender difference is found in the persistence pattern of life satisfaction.

This study investigates the dynamics of adolescents' life satisfaction and the effects of academic success on life satisfaction using the Korean Youth Panel Survey (KYPS) 2003-2007 data. Unlike previous studies, our dynamic ordered probit models allow for persistence in life satisfaction which is attributable both to unobserved individual heterogeneity and to state dependence. First, we find that strong state dependence exists in adolescents' life satisfaction, that is, current life satisfaction is significantly affected by the previous state. Second, we show that academic success undoubtedly has a positive effect on adolescents' life satisfaction even after controlling for state dependence. Finally, we present that there exists an interesting gender difference: boys show stronger persistence in the state of high life satisfaction, whereas girls have stronger persistence in dissatisfaction.