The development of rural collective economy is an inevitable choice to adapt to the new situation of agricultural and rural modernization and development. And it is also the way to achieve rural revitalization and farmers’ common prosperity in rural areas. Based on the collective action perspective and the 2016-2018 China Labor Force Dynamics Survey (CLDS) data, this paper analyzed the impacts of rural collective economic development on farmers’ happiness and its mechanism of action by the double fixed effect and mediating effect models and examined the moderating effect of village characteristics. Results show that compared to farmers who are relatively or very happy, 35.6% of farmers still feel unhappy. The finding that rural collective economic development contributes to farmers’ happiness passes endogeneity and robustness tests by the instrumental variable approach. Rural collective economic development mainly contributes to farmers’ happiness by improving infrastructure construction and ecological environment quality. Further analysis indicates that villages in the central and western regions, with higher levels of democracy and longer tenures of university student village officials and village chiefs, had a more significant effect of rural collective economic development on farmers’ happiness. Accordingly, this paper provides the following suggestions: accelerating the development of the new rural collective economy, improving the level of rural infrastructure construction and ecological environment governance, actively promoting rural democracy, and encouraging the tenure extension of village officials.