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Explaining the Easterlin Paradox

Two factors, concern about relative rather than absolute income and adaptation to increasing affluence, are central to the explanations offered for the Easterlin Paradox. This paper addresses the range of behavior for well-being that these factors might produce. A framework for the creation of models in which the behavior of well-being depends on the mechanisms governing the operation of the two factors is presented. Using it models that produce the paradox under well-defined conditions are developed. So are models in which well-being varies with average income. The explanations for the behavior of well-being provided by both types of models are shown to be plausible. In light of these results, deciding whether the two factors do in fact explain the paradox will require a detailed understanding of the way in which they operate. Developing that understanding remains a challenge.