Optimistic income expectations and meeting those expectations: What matters for well‐being in a developing country?

Published date01 May 2023
AuthorSha Fan,Renuka Mahadevan
Date01 May 2023
DOIhttp://doi.org/10.1111/sjpe.12332
Scott J Polit Econ . 2023;70:115–132. wileyonlinelibrary.com/journal/sjpe
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115
© 2022 Scottis h Economic Societ y.
1 | INTRODUCTION
The uncert ainty around jobs and h ence income expect ations is critical as s ome studies (Frijter s et al., 2012; Knight
& Gunatilaka, 2 010; Stutzer, 200 4) note the import ance of optimistic expect ations of income for improved well-
being. Well- being can also ref er to the pleasure from the at tainment of goals or valu ed outcomes in various area s
(Frey & Stutzer, 2002). Hence, t he achievement of the go al or the extent to wh ich an individual p erceives that
his/her aspirati ons have been met in relation to i ncome expectation s can influence well- being. To our knowledge,
Bertoni & Corazzini (2018) is the onl y study to empirically e xamine the impact of the d iscrepancy betwee n actual
income and incom e expectations (terme d as income forecasting e rror, FR) on well- being.
In this paper, we examin e not just the extent to which in come expectations are m et, but we also consider the
role of income exp ectations themsel ves and examine the moder ating role of social capit al (if any) on the effect of
unmet income exp ectations on happiness. I n doing so, our contributions to th e existing literature are thre efold.
Received: 18 Febr uary 2021 
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  Accepted: 12 July 20 22
DOI: 10 .1111/sjpe.1 2332
ORIGINAL ARTICLE
Optimistic income expectations and meeting
those expectations: What matters for well- being
in a developing country?
Sha Fan1| Renuka Mahadevan2
1Belt and Road S chool, Beijing Nor mal
University at Zhuhai, Zhuhai, China
2School of Econo mics, The Univer sity
of Queensland, Brisbane, Queensland,
Australia
Correspondence
Sha Fan, Belt an d Road School, Beiji ng
Normal Unive rsity at Zhuhai, E101, Li jiao
Building, No .18 Jinfeng Road, Zhuhai ,
Guangdong 519087, China.
Email: s.fan@bnu.edu.cn
Abstract
This paper examine s the impact of income ex pectations
and the extent to whic h these expectat ions are met, on
subjective well- being. For the Indonesian sample, exp ecta-
tions had asymmet ric effects on well- being, with pessimis-
tic expectat ions having a strong adver se effect compare d
with a weak positive ef fect of optimism. Opti mism im-
proves only females' and n ot males' well- being while pes-
simism has the reverse ef fect on both genders' well- being.
Although unmet expectati ons redu ced well- being for all
subgroups, the med iating role of social capit al to negate
this was limited to some sub groups. Results point toward a
gendered policy a genda and the rural– urban divi de to im-
prove we ll- being.
JEL CLASSIFI CATION
D84; I31; O12
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    FAN ANd MAHA dEVAN
First, we comp are and contrast the eff ects of positive and nega tive income expectati ons as well as the effect s of
unmet and exceed ing income expectations o n well- being. In additio n, we provide a theoretical de rivation on the
determinant s of well- being incorporating inc ome expectat ion and extent to whi ch they are met. Se cond, this is
the first st udy to examine the role of s ocial capital in poten tially countering the a dverse effect s of unmet expecta-
tions on well- being. Third, we examine heter ogeneity effect s arising from gender dif ferences and the rur al– urban
divide in the above relationships, providing new evidence not considered before.
We use the case stu dy of Indonesia to provide an inte rtemporal analysis of t he effect of two type s of income
expectati ons— expected f uture income, and the dis crepancy between in come expectations a nd income status re-
alized in the future— on well- bein g. Indonesia is the world's fourth most pop ulous country. Although Indone sia is a
lower middle- income economy, it is one of the faste st growing economie s in the world with an annu al GDP growth
rate at around 5% a nd an average unemployment rate of ab out 5.36% fro m 1991 to 2019 (Asian Develo pment
Bank, 2019). I ndonesia's urbanization levels a re also quite high for a developing count ry as 56.64% of the 2020
population live i n urban areas (from https://data.world bank.org/). We use three waves of da ta to trace the same
individuals over t ime and thus provide rob ust results. In this pa per, we use happiness, subjec tive or reported wel l-
being, and sat isfaction interchang eably as has been used in som e literature (see Frey & Stutzer, 2002).
The rest of the pa per is organized as follow s. The next secti on is the literature revi ew on this subject. S ection 2
describes th e data and variables considere d, while Section 3 present s the analyses of the empirica l results. The
last section concludes.
2 | LITERATURE RE VIEW
Since the 1950s, the con cept of well- being has be en a research focus i n various discipli nes. Employing var ious
theoretical frameworks and analyzed from the perspective of different disciplines, scholars recognize the hetero-
geneity with d ifferent individual gro ups and have extensively st udied the factors aff ecting subjective well- being.
Some studies a nalyze age patter ns and identify the U- shaped growth cur ve underlying s ubjective well- being
(Blanchflower, 2020; Ch eng et al., 2017; Gr aham & Pozuelo, 20 17). Others have e xamined the dete rminants of
happiness and we ll- being in both developing (B rockmann et al., 2009; Lim et al., 2020 ) and developed count ries
(Christensen et al., 2006; Robustelli & Whisman , 2018).
For instance, us ing the General Social Sur vey for the United States, Lawren ce et al. (2015) find happiness is
associated with l ongevity net of covar iates, including s ocio- economic statu s, while Levinson (201 2) discovers
a negative effe ct of air pollution o n happiness. For In donesia, using th e 2007 Indonesia n Family Life Survey,
Sohn (2016) shows the rela tionship betwe en height and happin ess, and the chan nel effect thr ough education
and income. Using t he same dataset , Sujarwoto & Tampubolo n (2015) highlight the rol e of fiscal and poli tical
decentraliza tion reform and socio- economic factors su ch as marital status a nd social ties in influe ncing happiness.
However, none of the ab ove studies discuss income expectations and that is the foc us of our paper. Although
theories hypo thesizing the imp ortance of futu re income expec tations on well- being (Das & van Soest , 1999;
Easterlin, 2001; Senik, 200 4) are well- grounded, the empirical ev idence of this effe ct in studies rem ains limited. The p i-
oneering empi rical study on th is from Senik (2008) us ed Russian longitudi nal data from 1994 to 200 0 to show a strong
effect of an imp rovement in one's materia l situation on life satis faction and sel f- rated healt h while Stutzer (200 4) used
a cross- se ctional survey on th e Swiss and found that higher i ncome aspirations redu ced life satisfactio n.
Research from D e Grip et al. (2012) shows that red uced generosity in pen sion adversely affec ts mental health
of Dutch workers ne aring retirement. Several s tudies on China (Frijters et al., 2012; G ao & Smyth, 2011; Knight
& Gunatilaka, 2 010; Liu & Shang , 2012) used cross- sectional dat a to show that higher income expec tations five
years from now have a po sitive significant effect o n happiness and this is true for mig rants, as well as the rural
and urban popu lation. Frijters et al. (2012) f ind that optimistic exp ectations were the mo st important expl anatory
variable affecting happiness.

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