Own-Sector and Inter-Sector Tunnel Effects: Implications for the Effects of Growth and Inequality on Happiness

Abstract

This note presents a simple model of Hirschman and Rothschild’s (1973) tunnel effect, which is generally interpreted as reducing inequality aversion. The model identifies two separate tunnel effects, associated with own-sector and inter-sector productivity shocks, that are closely related to two lines of empirical happiness research. Taken together, these effects produce a positive relationship between happiness and the rate of income growth and reduce inequality aversion among the rich. However, they increase inequality aversion among the poor, which is counter to the usual interpretation. This exercise suggests potential gains to formal modeling in the emerging happiness literature.