Andrew J. Oswald is unhappy. Some are claiming that happiness research has proved that marginal utility diminishes with rising income. They shouldn't, he argues in a recent IZA discussion paper On the Common Claim that Happiness Equations Demonstrate Diminishing Marginal Utility of Income:
It is commonly claimed in the recent happiness literature in psychology and economics that we have proved diminishing marginal utility of income. This paper suggests that we have not. It draws a distinction between concavity of the utility function and concavity of the reporting function.
To put this in a different way, happiness survey answers tell us which way is up or down. They do not persuasively tell us the speed of the rise or fall. It seems reasonable - given only mild assumptions - to argue that we have established, say, that greater income buys greater happiness, ceteris paribus. But in my judgment we have not done sufficiently more than this to allow us to be confident about rates of change.
How come? Because "we do not know the shape of the function relating ‘reported happiness’ to actual happiness. This is a serious problem..."