Individual well-being in urban China: The role of income expectations

Using household survey data, we study the determinants of individual well-being in urban China, emphasizing particularly the role of income expectations. First, we find that individual well-being increases contemporaneously with own income and decreases with communityʹs average income, consistent with findings reported in previous studies. This result holds when we replace income with consumption and when we consider employment and health status of other family members. Second and more important, we find that income expectations have a positive and significant effect on individual well-being. This result is robust to alternative model specifications and to controls for optimistic personality. Instrumental variable estimates and endogeneity tests suggest that the positive relationship between well-being and income expectations is genuine. Our finding has the potential to explain why reported well-being has declined in China despite the spectacular economic growth in the past decades.