Worldwide well-being efficiency and its determinants: New insights from the ordered probit stochastic Frontier model

Abstract

This paper examines how efficiently individuals and societies transform economic and social resources into subjective well-being. We propose an ordered probit stochastic frontier model that explicitly accounts for the ordinal nature of life satisfaction data while jointly estimating well-being shortfalls and their determinants within a single-stage framework. We also show why treating ordinal well-being indicators as continuous variables in conventional stochastic frontier models may lead to misleading inference and interpretation. Using World Values Survey data for more than 214,000 individuals across 74 countries, combined with macroeconomic and institutional indicators, we estimate attainable well-being levels conditional on individual and contextual characteristics. The results reveal substantial heterogeneity in well-being efficiency across individuals and countries. Institutional quality, social trust, and labor market conditions are strongly associated with well-being efficiency, while unemployment generates the largest shortfalls from attainable well-being. These findings highlight the importance of accounting for the ordinal nature of subjective well-being measures when analyzing well-being efficiency and its determinants.