Understanding fixed effects in human well-being

In studies of subjective well-being, economists and other researchers typically use a fixed or random effect estimation to control for unobservable heterogeneity across individuals. Such individual heterogeneity, although substantially reducing the estimated effect of many characteristics, is little understood. This paper shows that personality measures can account for 20% of this heterogeneity and a further 13% can be accounted for by other observable between-person information. This paper then demonstrates that the use of personality measures, in a new technique developed by Plumper and Troeger (2007). can help researchers obtain improved estimates for important characteristics such as marital status, disability and income. The paper argues that this has important practical implications. (C) 2009 Elsevier B.V. All rights reserved.