Abstract:  The cross-sectional studies show a positive relationship between income and happiness whereas the long-term series studies—usually a period of 10 years or more—show there is a nil relationship between them, which is the so-called happiness-income paradox. Previous studies usually explain the happiness- income paradox from the perspective of theory such as Set-Point Theory, Adaptation Theory, or Relative Utility Theory. Recently, researchers have paid much concern to the omitted variables. Five types of omitted variables, including income inequality, education, social capital, individualism-collectivism and marital status, are introduced in this article to interpret the phenomenon. The negative effects of omitted variables on happiness offset the positive effect of income, which leads to an occurrence of happiness-income paradox.

Key words: happiness-income paradox, happiness, income, omitted variables