Happiness, Adaptation, and Decreasing Marginal Utility of Income

Happiness studies both support and question diminishing marginal utility of income. Cross-sectional studies support the proposition that marginal utility of income declines with income, but longitudinal studies indicate that marginal utility of income is zero once basic needs are met. Adaptation to income increases has been used to reconcile these two empirical results. This seems to suggest that the marginal utility of income decreases in the short run, but not in the long run, over a wide range of income in wealthy countries. Making use of loss aversion, however, it is shown that income transfers from the rich to the poor are likely to reduce total utility in the short run while having no long-run effect.