Individual well-being in urban China: The role of income expectations

Using household survey data, we study the determinants of individual well-being in urban China, emphasizing particularly the role of income expectations. First, we find that individual well-being increases contemporaneously with own income and decreases with community's average income, consistent with findings reported in previous studies. This result holds when we replace income with consumption and when we consider employment and health status of other family members. Second and more important, we find that income expectations have a positive and significant effect on individual well-being. This result is robust to alternative model specifications and to controls for optimistic personality. Instrumental variable estimates and endogeneity tests suggest that the positive relationship between well-being and income expectations is genuine. Our finding has the potential to explain why reported well-being has declined in China despite the spectacular economic growth in the past decades.

► Using Chinese data we estimate the effect of income expectations on well-being. ► We control for personality and past income changes, and obtain IV estimates. ► Instrumental variables include job contract type and firm profitability. ► We find a positive and significant effect of income expectations on well-being. ► The main finding has the potential to explain recent declines of happiness in China.