The last few decades have seen a significant surge in studies examining the determinants of wellbeing, and the emergence of the relatively new field referred to as the economics of wellbeing. The heightened interest in this area of research, in part, is due to the significance of such elements as wellbeing, optimal health and human capital in promoting economic development. The importance of wellbeing is therefore recognised by governments, policymakers and academics. Although psychologists and sociologists have a long history in the study of wellbeing, the seminal works of Easter- lin represent a milestone for research into understanding the economics of wellbeing (see, Easterlin 1973, 1974, 1995). Following Easterlin’s work which examined the association between income and individual self-reported life satisfaction (also known more broadly as subjective wellbeing), a relatively large body of literature has explored the various determinants of subjective wellbeing.

Along these lines, the social and economic determinants of wellbeing have received much attention in the literature. One determinant that has received much attention is religiosity. Existing work on religiosity as a determinant of wellbeing cuts across various disciplines including economics, psychology and sociology. Within this strand of literature, the majority of the studies report a positive association between religiosity and wellbeing, measured by such outcomes as depressions, life satisfaction, self-esteem, mental health and emotional maturity, among others (see, for example, Diener et al. 1999; Ellison 1995, 1998; Emmons et al. 1998; George et al. 2002, 2000; Levin et al. 1996; Mickley et al. 1995). Similarly, systematic reviews of the literature on religiosity and wellbeing often report positive effects of religiosity on subjective wellbeing (for example see, Ellison and Levin 1998; Hackney and Sanders 2003). However, some studies report a negative effect of religiosity on wellbeing. For instance, King and Schafer (1992) find evidence of a negative impact of religiosity on wellbeing measured by personal distress. Along these lines, Hackney and Sanders (2003) suggest that the observed relationship between religiosity and wellbeing depends on the dimensions of religiosity and wellbeing being examined.

In the tradition of Easterlin, several studies have also examined the effect of income on wellbeing, while several others have controlled for income in wellbeing regressions (see, Awaworyi Churchill and Mishra 2017; Cummins 2000; Diener and Oishi 2000; Diener et al. 1993; Headey and Wooden 2004).

Our study seeks to broaden knowledge on the interaction between religiosity and income, and how this affects wellbeing in a developing country context. Specifically, we address the question; what is the interplay among religiosity, income, and wellbeing in developing countries? Existing studies have focussed on examining empirically the effect of religiosity, and the effect of income on wellbeing in isolation. Empirical studies examining the possible interactive effect of religiosity and income on wellbeing remain scarce although it is inferred in the literature (Hoverd and Sibley 2013).

Our choice of estimation sample (namely, developing countries) is informed by existing surveys such as the Gallup Poll which report developing countries as the most religious in the world (Crabtree 2010). It is interesting to explore the potential reasons for these above-average levels of religiosity in developing countries. Furthermore, while a relatively large body of literature examines the impact of religiosity on wellbeing, not much has been done in the context of developing countries, yet they constitute the world’s poorest and most religious. We argue that the returns to religiosity, especially in terms of wellbeing, is a major factor contributing to the level of religiosity. In this regard, religiosity serves as a support for the poor that has spill-overs in terms of wellbeing (Diener et al. 2011; Hoverd and Sibley 2013).

Additionally, while the existing literature has provided a relatively clear overview of the association between religiosity and wellbeing, the potential endogeneity between these two variables has not been rigorously considered and addressed. For instance, it is likely that individuals with higher levels of wellbeing or life satisfaction would be more inclined to join certain social groups including religious groups (Awaworyi Churchill and Mishra 2017). However, it is also likely that individuals with lower levels of life satisfaction, would want to seek solace in a higher power or deity, or perhaps seek support from religion (Diener et al. 2011), thereby raising their levels of religiosity. There is, therefore, a possibility of reverse causality between religiosity and wellbeing, and if not addressed, reported estimates on the effect of religiosity on wellbeing may be flawed and biased. We adopt the Lewbel (2012) heteroscedasticity adjusted instruments to control for the potential endogeneity and also as a robust check to our main results.

Additionally, some researchers (e.g. Chakravarti 2006; Sen 2001) have argued that poverty and wellbeing transcend measures of income to include other psychological and sociological factors including religion. However, existing research does not empirically show how these multiple measures co-constitutively affect wellbeing, whether they affect wellbeing differently or which factor has more impact, and so should be given more attention to improve wellbeing.

In this study, we contribute to the existing literature in three ways. Firstly, we examine, separately and independently, the impact of religiosity and income on subjective wellbeing in a developing country context. In doing so, we address the endogenous nature of these relationships. Secondly, we examine the interplay between religiosity and income, and how this impacts upon wellbeing. Specifically, we examine the combined effects of religiosity and income on wellbeing, by introducing an interaction term which reveals how the interplay between religiosity and income impacts upon wellbeing. To our knowledge, this relationship has not been explored empirically, and thus we contribute to the existing literature by presenting an alternative perspective on the debate concerning the environment within which religiosity affects wellbeing. Thirdly, we use a wide range of measures for religiosity, which allows us to examine the validity of our results across various constructs of religiosity. Based on arguments suggesting that the direction of the relationship between religiosity and wellbeing is dependent on the measure of religiosity used (Hackney and Sanders 2003), we ensure the robustness of our results by adopting various measures of religiosity.