You can't always get what you want: observations on self-reported satisfaction, consumption, and underlying utility
Although social science surveys have long asked respondents to report levels of life satisfaction or happiness, economists have only begun to use those data in the last ten years or so. Other social scientists often joke that, rather than simply ask what makes people happy, economists would rather use data on observed consumption to infer the shape and arguments in a utility function. The hesitation is founded on an inherent skepticism on the part of economists about outcomes that cannot be verified through objective behavior and on the very powerful notion that preferences are revealed through observed behavior. In their survey of the growing economics literature that studies happiness, Frey and Stutzer (2002) suggest that economists can learn much if they would directly study data on life satisfaction. Among other things, they suggest that measures of life satisfaction or subjective well-being can proxy for utility. If one accepts these measures as a proxy for utility then one can then estimate those goods and activities that directly yield utility. Frey and Stutzer point to numerous possible determinants of life satisfaction and review the empirical associations that have been identified to date in the literature. These include consumption, both absolute and relative income and wealth, social status, unemployment (both individual and aggregate), inflation, and the democratic institutions and processes in the society in which a person lives. Frey and Stutzer suggest that studying the determinants of life-satisfaction will yield implications for economic theory and public policies. It is possible to use measures of life-satisfaction to shape public policy if one is willing to assume that life-satisfaction measures can be used to construct a social welfare function. From this leap one can then examine how social welfare increases or diminishes with policies such as taxes, income redistribution, levels of inflation, and unemployment. This logic can be extended to analyze how individual well-being is affected by being unemployed or by the consumption of various goods. Data from both Britain (Clark and Oswald 1994) and Germany (Knut and Gesine 1996) suggest that observationally equivalent individuals suffer lower subjective well-being when they are unemployed than when they are employed. Others have argued that irrational consumers suffer lower levels of life-satisfaction when they become addicted to goods such as cigarettes. The basis for such inferences is an assumption that consumers of addictive goods fail to make decisions consistently over time and that they suffer self-control problems. These assumptions form the basis of the model of cigarette addiction of Gruber and Köszegi (2001).
Gruber and Mullainathan (2002) adopt these
assumptions to argue that cigarette excise taxes may make smokers better off. They use life-satisfaction measures from the General Social Surveys in the United States and in Canada to show that higher cigarette taxes are associated with higher levels of self-reported happiness among people who are predicted to be smokers. They argue that predicted smokers are happier when they face higher taxes because it helps them abstain from smoking. Gruber and Köszegi (2004) adopt the assumption that these results are causal to investigate what level of cigarette excise taxes would maximize social welfare.
This paper presents evidence that cautions against the rush to such exercises. The evidence challenges the assumption on which the above analyses are shakily founded - that cigarette use causes people to be less happy. Using panel data from Great Britain (British Household Panel Study) and Germany (German Socio-Economic Panel), I show that unhappy people are more likely to start smoking and that people are more likely to quit when they become happier. These results are consistent with a model in which individuals are not addicted to cigarettes but instead use cigarettes to medicate symptoms of a preexisting mental condition. That model implies that happiness determines cigarette consumption not the reverse. It also implies that reduction in smoking brought about by an increase in taxes will reduce consumer welfare. These findings are consistent with the idea that smokers rationally choose to smoke and rationally choose to quit smoking. The idea that smokers use cigarettes to medicate mental states is consistent with clinical findings that buproprion - a known antidepressant - is effective in getting smokers to quit. Until recently, buproprion, was the only non-nicotine replacement product that was approved by the FDA for use as a smoking cessation treatment (marketed under the name Zyban). The findings are also consistent with observed patterns of quitting among smokers - that is smokers make several attempts to quit. This pattern has long been interpreted as evidence that individuals are addicted to nicotine - and indeed it may be - but the important policy implication is that consumer well-being will not be improved if we could magically eliminate cigarettes from our economy. Quite the contrary, consumer well-being would drop drastically because the nicotine mitigates the underlying mental condition and the removal of a ready source of nicotine would imply that millions of smokers would suffer greater mental anguish. These observations should not be interpreted to mean that there are not costs associated with smoking. Incontrovertible evidence links smoking to reductions in health and increased risk from a host of illnesses. I also don't claim that everyone who smokes does so to medicate himself. Indeed, elsewhere I show that advertising is very effective in getting youth to smoke (Lillard and Sfekas 2004). What is interesting from that research is that only a small fraction of youth who try cigarettes remain as smokers. The question remains as to who and why some youth continue to smoke while others do not. More generally this paper shows, using longitudinal data that allows us to document levels of and changes in life satisfaction before an individual starts or before he or she stops smoking. This evidence can then be used to assign the direction of causality between life satisfaction and one type of consumption smoking. References
Clark, A.E., and Oswald, A.J. (1994), Unhappiness and unemployment, Economic
Frey, B.S. and Stutzer, A. (2002), What can economists learn from happiness
research, Journal of Economic Literature 40, 402-435
Gruber, J. and Koszegi, B. (2001) “Is Addiction Rational? Theory and Evidence”
Quarterly Journal of Economics, 116(4), 1261-1303
Gruber, J. and Koszegi, B. (2004) “Tax Incidence When Individuals are Time
Inconsistent: The Case of Cigarette Excise Taxes” Journal of Public Economics, 88(9-10), 1959-1988
Gruber, J. and Mullainathan, S. (2002), Do Cigarette Taxes Make Smokers Happier?,
Gerlach, Knut & Stephan, Gesine, 1996. "A paper on unhappiness and unemployment
in Germany," Economics Letters, Elsevier, vol. 52(3), pages 325-330, 9.
Lillard, Dean and Andew Sfekas. 2004. “The Effect of Advertising on Smoking
Experimentation” Manuscript. Department of Policy Analysis and Management, Cornell University.
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