Nominal or Real? The Impact of Regional Price Levels on Satisfaction with Life

Abstract

According to economic theory, real income, i. e., nominal income adjusted for purchasing power, should be the relevant source of life satisfaction. Previous work, however, has studied the impact of inflation-adjusted nominal income and hardly taken into account regional differences in purchasing power. We use novel data to study how regional price levels affect life satisfaction. The data set comprises a price level for each of the 428 administrative districts in Germany. Controlling for district heterogeneity other than the price level, our results show that higher price levels significantly reduce life satisfaction.