Who gets what
Money Supply, Class Power, and Inflation: Monetarism Reassessed
Ho-fung Hung & Daniel Thompson
American Sociological Review, June 2016, Pages 447-466
Abstract:
Recent sociological work shows that pro-market neoliberal policies across advanced capitalist countries are due to distributional struggle between classes in the 1970s and 1980s. The orthodox monetarist view, alternatively, sees neoliberal reform as a nonpolitical attempt to end the stagflation crisis of the 1970s. From this perspective, monetary and fiscal expansions brought high inflation, and central bank discipline and government austerity is the solution; but the recent trend of low inflation despite accelerating money growth and government spending contradicts this view. Analyses of time-series cross-section data for 23 OECD countries from 1960 to 2009 support the thesis that the rise and fall of inflation is more about distribution of power between labor and capital than about monetary and fiscal discipline. Inflation in the 1970s originated from a strong working class and hurt capital more than it did workers, while neoliberal repression of workers' power has kept inflation low from the 1980s onward. Disempowerment of labor created rising inequality and economic imbalances that fueled a financial boom underlying the global financial crisis of 2008. Re-empowering labor is a remedy to such imbalances and the subsequent deflationary pressure.
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Adam Smith on What Is Wrong with Economic Inequality
Dennis Rasmussen
American Political Science Review, forthcoming
Abstract:
This article explores Adam Smith's attitude toward economic inequality, as distinct from the problem of poverty, and argues that he regarded it as a double-edged sword. On the one hand, as has often been recognized, Smith saw a high degree of economic inequality as an inevitable result of a flourishing commercial society, and he considered a certain amount of such inequality to be positively useful as a means of encouraging productivity and bolstering political stability. On the other hand, it has seldom been noticed that Smith also expressed deep worries about some of the other effects of extreme economic inequality - worries that are, moreover, interestingly different from those that dominate contemporary discourse. In Smith's view, extreme economic inequality leads people to sympathize more fully and readily with the rich than the poor, and this distortion in our sympathies in turn undermines both morality and happiness.
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Capital in the Twenty-First Century - in the Rest of the World
Michael Albertus & Victor Menaldo
Annual Review of Political Science, 2016, Pages 49-66
Abstract:
Recent work has documented an upward trend in inequality since the 1970s that harks back to the Gilded Age: the inegalitarian pre-World War I world. Most prominently, Thomas Piketty argues in Capital in the Twenty-First Century that this is partially due to the fact that capitalism is hardwired to exacerbate the gap between the rich and poor. By critically evaluating recent literature on this topic, this article offers three big contributions. First, we advance an alternative explanation for the long-term U-shaped nature of inequality that Piketty examines. Political regime types and the social groups they empower, rather than war and globalization, can account for the sharp fall and then sharp rise in inequality over the long 20th century. Second, we demonstrate that this U-shaped pattern only really holds for a handful of industrialized economies and a subset of developing countries. Finally, we provide a unified framework centered on two unorthodox assumptions that can explain inequality patterns beyond the U-shaped one. Capitalists and landholders actually prefer democracy if they can first strike a deal that protects them after transition. This is because dictators are not the loyal servants of the economic elite they are portrayed to be - in fact, they are often responsible for soaking, if not destroying, the rich under autocracy.
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Growth of income and welfare in the U.S, 1979-2011
John Komlos
NBER Working Paper, April 2016
Abstract:
We estimate growth rates of real incomes in the U.S. by quintiles using the Congressional Budget Office's (CBO) post-tax, post-transfer data as basis for the period 1979-2011. We improve upon them by including only the present value of earnings that will accrue in retirement and excluding items included in the CBO income estimates such as "corporate taxes borne by labor" that do not increase either current purchasing power or utility. We estimate a high and a low growth rate using two price indexes, the CPI and the Personal Consumption Expenditure index. The major consistent findings include what in the colloquial is referred to as the "hollowing out" of the middle class. According to these estimates, the income of the middle class 2nd and 3rd quintiles increased at a rate of between 0.1% and 0.7% per annum, i.e., barely distinguishable from zero. Even that meager rate was achieved only through substantial transfer payments. In contrast, the income of the top 1% grew at an astronomical rate of between 3.4% and 3.9% per annum during the 32-year period, reaching an average annual value of $918,000, up from $281,000 in 1979 (in 2011 dollars). Hence, the post-tax, post-transfer income of the 1% relative to the 1st quintile increased from a factor of 21 in 1979 to a factor of 51 in 2011. However, income of no other group increased substantially relative to that of the lowest quintile. Oddly, the income of even those in the 96-99 percentiles increased only from a multiple of 8.1 to a multiple of 11.3. We next estimate growth in welfare assuming diminishing marginal utility of income. A logarithmic utility function yields a growth in welfare for the middle class of roughly 0.01% to 0.07% per annum, which is indistinguishable from zero. With interdependent utility functions only the welfare of the 5th quintile experienced meaningful growth while those of the first four quintiles tend to be either negligible or even negative.
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The Unequal Gains from Product Innovations
Xavier Jaravel
Harvard Working Paper, May 2016
Abstract:
Using detailed product-level data in the retail sector in the United States from 2004 to 2013, this paper shows that product innovations disproportionately benefited high-income households due to increasing inequality and the endogenous response of supply to market size. Annualized quality-adjusted inflation was 0.65 percentage points lower for high-income households, relative to low-income households. Using national and local changes in market size driven by demographic trends plausibly exogenous to supply factors, the paper provides causal evidence that a shock to the relative demand for goods (1) affects the direction of product innovations, and (2) leads to a decrease in the relative price of the good for which demand became relatively larger (i.e. the long-term supply curve is downward sloping). A calibration shows that this channel can explain most of the observed difference in quality-adjusted inflation rates across the income distribution.
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Emily Rauscher
American Journal of Sociology, May 2016, Pages 1697-1761
Abstract:
Existing evidence of educational effects on intergenerational mobility is associational. This study employs early compulsory schooling laws to approach a causal estimate of the relationship between education and mobility in the context of a large-scale policy change. Using IPUMS Linked Representative Samples (linked census data), regression discontinuity models exploit state differences in the timing of compulsory schooling laws to estimate an intent-to-treat effect on intergenerational occupational mobility among white males. Despite increasing equality of attendance, results reveal that compulsory laws initially reduced relative mobility for the first few cohorts affected by the laws. Among later cohorts, who were required to attend the maximum years of school, mobility was similar to prelaw levels. School funding and other data suggest that structural lag could explain this nonlinear relationship. It seems, therefore, that educational expansion inadvertently reduced mobility through institutional inertia rather than elite efforts to maintain advantage.
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Roel Beetsma, Alex Cukierman & Massimo Giuliodori
American Economic Journal: Economic Policy, forthcoming
Abstract:
We present legislative, historical, and statistical evidence of a substantial upward ratchet in transfers and taxes in the US due to World-War II. This finding is explained within a political-economy framework with defense spending responding to a war threat and a median voter in the population who interacts with a (richer) agenda setter in Congress in setting redistribution. While the setter managed to cap redistribution before the War, the War itself raised the status-quo tax burden and improved tax collection technology, strengthening the bargaining power of the median voter as defense spending receded. This permanently raised the level of redistribution.
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Physical and situational inequality on airplanes predicts air rage
Katherine DeCelles & Michael Norton
Proceedings of the National Academy of Sciences, 17 May 2016, Pages 5588-5591
Abstract:
We posit that the modern airplane is a social microcosm of class-based society, and that the increasing incidence of "air rage" can be understood through the lens of inequality. Research on inequality typically examines the effects of relatively fixed, macrostructural forms of inequality, such as socioeconomic status; we examine how temporary exposure to both physical and situational inequality, induced by the design of environments, can foster antisocial behavior. We use a complete set of all onboard air rage incidents over several years from a large, international airline to test our predictions. Physical inequality on airplanes - that is, the presence of a first class cabin - is associated with more frequent air rage incidents in economy class. Situational inequality - boarding from the front (requiring walking through the first class cabin) versus the middle of the plane - also significantly increases the odds of air rage in both economy and first class. We show that physical design that highlights inequality can trigger antisocial behavior on airplanes. More broadly, these results point to the importance of considering the design of environments - from airplanes to office layouts to stadium seating - in understanding both the form and emergence of antisocial behavior.
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How the Rich Drive Progressive Marginal Tax Rates
Jason Oh
University of California Working Paper, April 2016
Abstract:
Why do income tax systems consistently feature progressive marginal rates? The existing literature tells a political story focusing on the preferences of the poor and middle class - high rates at the top of the rate schedule can fund greater redistribution. This Article argues that progressive marginal rates can alternatively be explained by focusing on the preferences of the middle class and the rich regarding the bottom of the rate schedule. Specifically, these groups benefit from inframarginal rate cuts at low levels of income. This alternative explanation of marginal rate progressivity is attractive because it focuses on the rich, a group which intuition and research suggest wields disproportionate political power. To make this argument, I use an optimal tax model and focus on two types of changes to the income tax schedule - incremental adjustments and major reform. With respect to incremental changes, I show that middle and upper-income taxpayers generally benefit from reductions in marginal rates at low incomes. With respect to more significant changes to the rate schedule, I use Markov chain Monte Carlo ("MCMC") simulations to explore the policy cycling that results from majoritarian voting. The simulations suggest (1) that progressive rate schedules are generally much more likely than linear or regressive schedules, (2) that progressive rate schedules become more likely as political power is concentrated in the hands of the rich, and (3) progressive rate schedules are still predominant even if the median voter has more income than the average taxpayer.
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The Dynamics of Wealth Inequality and the Effect of Income Distribution
Yonatan Berman, Eshel Ben-Jacob & Yoash Shapira
PLoS ONE, April 2016
Abstract:
The rapid increase of wealth inequality in the past few decades is one of the most disturbing social and economic issues of our time. Studying its origin and underlying mechanisms is essential for policy aiming to control and even reverse this trend. In that context, controlling the distribution of income, using income tax or other macroeconomic policy instruments, is generally perceived as effective for regulating the wealth distribution. We provide a theoretical tool, based on the realistic modeling of wealth inequality dynamics, to describe the effects of personal savings and income distribution on wealth inequality. Our theoretical approach incorporates coupled equations, solved using iterated maps to model the dynamics of wealth and income inequality. Notably, using the appropriate historical parameter values we were able to capture the historical dynamics of wealth inequality in the United States during the course of the 20th century. It is found that the effect of personal savings on wealth inequality is substantial, and its major decrease in the past 30 years can be associated with the current wealth inequality surge. In addition, the effect of increasing income tax, though naturally contributing to lowering income inequality, might contribute to a mild increase in wealth inequality and vice versa. Plausible changes in income tax are found to have an insignificant effect on wealth inequality, in practice. In addition, controlling the income inequality, by progressive taxation, for example, is found to have a very small effect on wealth inequality in the short run. The results imply, therefore, that controlling income inequality is an impractical tool for regulating wealth inequality.
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Steven Durlauf, Andros Kourtellos & Chih Ming Tan
Journal of Business and Economic Statistics, forthcoming
Abstract:
In this paper, we explore nonlinearities in the intergenerational mobility process using threshold regression models. We uncover evidence of threshold effects in children's outcomes based on parental education and cognitive and non-cognitive skills as well as their interaction with offspring characteristics. We interpret these thresholds as organizing dynastic earnings processes into "status traps". Status traps, unlike poverty traps, are not absorbing states. Rather, they reduce the impact of favorable shocks for disadvantaged children and so inhibit upward mobility in ways not captured by linear models. Our evidence of status traps is based on three complementary datasets; i.e., the PSID, the NLSY, and US administrative data at the commuting zone level, which together suggest that the threshold-like mobility behavior we observe in the data is robust for a range of outcomes and contexts.
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Ethnic Diversity and Support for Redistributive Social Policies
Liza Steele
Social Forces, June 2016, Pages 1439-1481
Abstract:
Scholars and public figures have drawn attention to lower social spending in more ethnically diverse countries, and explicitly or implicitly claimed that this resulted from a lack of public support for more generous social-spending policies in more diverse countries - despite the lack of empirical evidence on the topic. Such arguments ultimately hinge on how diversity is related to attitudes about distribution. However, empirical studies of the relationship between social-spending attitudes and diversity in cross-national perspective are scarce and limited in geographic scope, and have yielded inconsistent results. Through a study of individual-level attitudes in 91 countries in this paper, I explore the relationship between ethnic diversity and actual attitudes about social spending using two different cross-national public opinion data sets, and multiple approaches to measuring diversity. The results of 48 regression models show that ethnic diversity itself is not negatively related, and may even be positively related, to support for redistributive social spending, which challenges the prevailing assumption about the divisiveness of ethnic diversity. There is one exception - support for redistribution may be lower when there have been large increases in the size of the immigrant population in a country, but only in countries in which economic inequality is particularly acute.
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When Fair Isn't Fair: Sophisticated Time Inconsistency in Social Preferences
James Andreoni et al.
Stanford Working Paper, March 2016
Abstract:
How do people think about fairness in settings with uncertainty? One view holds that fairness requires equality of opportunity; another holds that it requires equality of outcomes. Relative to the resolution of uncertainty, the first view takes an ex ante perspective, while the second takes an ex post perspective. In this paper, we conduct a laboratory experiment designed to determine which perspective people adopt, and under what conditions. We find that most people view fairness from an ex ante perspective when making decisions ex ante, and from an ex post perspective when making decisions ex post. As a result, they exhibit the hallmark of time-inconsistency: after making an initial plan that is fully state-contingent, they revise it upon learning that certain states will not occur. These patterns are robust and persist even when people are aware of their proclivities. Indeed, subjects who switch from ex ante fair to ex post fair choices, and who are aware of this proclivity, generally avoid precommitments and intentionally retain the flexibility to manifest time inconsistency. We argue that these patterns are best explained by a theory of nominal fairness.
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Public Education Expenditures, Growth and Income Inequality
Lionel Artige & Laurent Cavenaile
NYU Working Paper, April 2016
Abstract:
Governments throughout the world spend a lot of public money on education to give any child a chance to have access to well-paid jobs and foster aggregate income growth. The theoretical literature tends to consider that public education is also an emancipatory force which contributes to reducing income inequality. The empirical evidence on this is rather scarce but tends to support the existing theoretical literature conclusions. This paper documents a U-shaped relationship between public education spending and income inequality for a cross-section of 140 countries as well as across US states. We investigate theoretically the potential ambiguous role of public education towards income inequality and identify the potential causes of this U-shaped relationship. We do so by modeling the demand and the supply of the education sector in an overlapping-generations model with heterogenous agents and occupational choice. If an increase in public education spending benefits all through an improvement of production efficiency, it also affects the labor supply in each occupation, which results in first a reduction and then a rise in income inequality as public education spending increases. Finally, we calibrate our model on data from 8 OECD countries and show that some countries, including the U.S., could spend more on public education to yield more income growth and less income inequality.
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Inequality, Costly Redistribution and Welfare in an Open Economy
Pol Antras, Alonso de Gortari & Oleg Itskhoki
Harvard Working Paper, March 2016
Abstract:
This paper studies the welfare implications of trade liberalization in a world in which trade increases income inequality, and in which redistribution needs to occur via a distortionary income tax-transfer system. We provide tools to characterize and quantify the actual amount of compensation that will take place following trade opening, as well as the efficiency costs of undertaking such redistribution. We propose two types of adjustments to standard measures of the welfare gains from trade: a 'welfarist' correction inspired by the Atkinson (1970) index of inequality, and a 'costly-redistribution' correction capturing the efficiency costs associated with the behavioral responses of agents to trade-induced shifts across marginal tax rates. We calibrate our model to the United States over the period 1979-2007 using data on the distribution of adjusted gross income in public samples of IRS tax returns, as well as CBO information on the tax liabilities and transfers received by agents at different percentiles of the U.S. income distribution. Our quantitative results suggest that these corrections are nonnegligible and erode about one-fifth of the gains from trade.
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James Mirrlees
Contemporary Economic Policy, July 2016, Pages 399-402
Abstract:
Wealth inequality comes about mainly as a result of lifetime accumulation of capital and risky investment. Evidence from the Forbes Rich Lists show that in recent years volatility of the wealth of the richest has been very great. Randomness of returns to capital can explain a substantial part of global wealth inequality. As a consequence, inequality can best be reduced by a tax on returns to capital in excess of a normal rate of return, in addition to tax on labor earnings.
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The Impact of the Civil War on Southern Wealth Holders
Brandon Dupont & Joshua Rosenbloom
NBER Working Paper, April 2016
Abstract:
The U.S. Civil War and emancipation wiped out a substantial fraction of southern wealth. The prevailing view of most economic historians, however, is that the southern planter elite was able to retain its relative status despite these shocks. Previous studies have been hampered, however, by limits on the ability to link individuals between census years, and have been forced to focus on persistence within one or a few counties. Recent advances in electronic access to the Federal Census manuscripts now make it possible to link individuals without these constraints. We exploit the ability to search the full manuscript census to construct a sample that links top wealth holders in 1870 to their 1860 census records. Although there was an entrenched southern planter elite that retained their economic status, we find evidence that the turmoil of 1860s opened greater opportunities for mobility in the South than was the case in the North, resulting in much greater turnover among wealthy southerners than among comparably wealthy northerners.
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Nour Kteily, Jennifer Sheehy-Skeffington & Arnold Ho
Journal of Personality and Social Psychology, forthcoming
Abstract:
Debate surrounding the issue of inequality and hierarchy between social groups has become increasingly prominent in recent years. At the same time, individuals disagree about the extent to which inequality between advantaged and disadvantaged groups exists. Whereas prior work has examined the ways in which individuals legitimize (or delegitimize) inequality as a function of their motivations, we consider whether individuals' orientation toward group-based hierarchy motivates the extent to which they perceive inequality between social groups in the first place. Across 8 studies in both real-world (race, gender, and class) and artificial contexts, and involving members of both advantaged and disadvantaged groups, we show that the more individuals endorse hierarchy between groups, the less they perceive inequality between groups at the top and groups at the bottom. Perceiving less inequality is associated with rejecting egalitarian social policies aimed at reducing it. We show that these differences in hierarchy perception as a function of individuals' motivational orientation hold even when inequality is depicted abstractly using images, and even when individuals are financially incentivized to accurately report their true perceptions. Using a novel methodology to assess accurate memory of hierarchy, we find that differences may be driven by both antiegalitarians underestimating inequality, and egalitarians overestimating it. In sum, our results identify a novel perceptual bias rooted in individuals' chronic motivations toward hierarchy-maintenance, with the potential to influence their policy attitudes.
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Kyung Joon Han & Eric Graig Castater
Research in Social Stratification and Mobility, forthcoming
Abstract:
There has been a scholarly consensus that greater union strength translates into lower levels of wage inequality. However, recent evidence indicates that this union effect disappeared in the 1990s. We argue that unions still reduce wage inequality, but that their effect is dependent on the type of workers that are actually unionized. Using survey data, we construct a variable that measures the proportion of union members that are unskilled manual workers in twenty wealthy democracies. We find that as the share of these workers rises, wage inequality falls, regardless of the level of union density, the level of union coverage, or whether a country has liberal, mixed, or coordinated market economy. However, the proportion of union members that are unskilled manual workers has no effect on wage inequality when wage bargaining institutions are decentralized, likely because such workers are unable to extract wage gains from their more skilled and higher paid union brethren in such an institutional context. These results suggest that the unitary actor assumption, so commonly employed by scholars to explain union effects on political and socio-economic outcomes, is misplaced; and that even though politicians may be more responsive to the policy preferences of the wealthy, poorer individuals can achieve relative economic gains when properly organized.
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The Importance of Family Income in the Formation and Evolution of Non-Cognitive Skills in Childhood
Jason Fletcher & Barbara Wolfe
NBER Working Paper, April 2016
Abstract:
Little is known about the relationship between family income and children's non-cognitive (or socio-emotional) skill formation. This is an important gap, as these skills have been hypothesized to be a critical link between early outcomes and adult socioeconomic status. This paper presents new evidence of the importance of family income in the formation and evolution of children's non-cognitive skills using a recent US panel dataset that tracks children between grades K-5. Findings suggest an important divergence in non-cognitive skills based on family income that accumulates over time and does not seem to be explained by children's health status differences.
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Income inequality within urban settings and depressive symptoms among adolescents
Roman Pabayo et al.
Journal of Epidemiology & Community Health, forthcoming
Methods: We analysed the cross-sectional data from a sample of 1878 adolescents living in 38 neighbourhoods participating in the 2008 Boston Youth Survey. Using multilevel linear regression modelling, we: (1) estimated the association between neighbourhood income inequality and depressive symptoms, (2) tested for cross-level interactions between sex and neighbourhood income inequality and (3) examined neighbourhood social cohesion as a mediator of the relationship between income inequality and depressive symptoms.
Results: The association between neighbourhood income inequality and depressive symptoms varied significantly by sex, with girls in higher income inequality neighbourhood reporting higher depressive symptom scores, but not boys. Among girls, a unit increase in Gini Z-score was associated with more depressive symptoms (β=0.38, 95% CI 0.28 to 0.47, p=0.01) adjusting for nativity, neighbourhood income, social cohesion, crime and social disorder. There was no evidence that the association between income inequality and depressive symptoms was due to neighbourhood-level differences in social cohesion.
Conclusions: The distribution of incomes within an urban area adversely affects adolescent girls' mental health; future work is needed to understand why, as well as to examine in greater depth the potential consequences of inequality for males, which may have been difficult to detect here.
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Income Mobility Breeds Tolerance for Income Inequality: Cross-National and Experimental Evidence
Azim Shariff, Dylan Wiwad & Lara Aknin
Perspectives on Psychological Science, May 2016, Pages 373-380
Abstract:
American politicians often justify income inequality by referencing the opportunities people have to move between economic stations. Though past research has shown associations between income mobility and resistance to wealth redistribution policies, no experimental work has tested whether perceptions of mobility influence tolerance for inequality. In this article, we present a cross-national comparison showing that income mobility is associated with tolerance for inequality and experimental work demonstrating that perceptions of higher mobility directly affect attitudes toward inequality. We find support for both the prospect of upward mobility and the view that peoples' economic station is the product of their own efforts, as mediating mechanisms.
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Social Mobility and Stability of Democracy: Re-Evaluating De Toqueville
Daron Acemoglu, Georgy Egorov & Konstantin Sonin
NBER Working Paper, April 2016
Abstract:
An influential thesis often associated with De Tocqueville views social mobility as a bulwark of democracy: when members of a social group expect to join the ranks of other social groups in the near future, they should have less reason to exclude these other groups from the political process. In this paper, we investigate this hypothesis using a dynamic model of political economy. As well as formalizing this argument, our model demonstrates its limits, elucidating a robust theoretical force making democracy less stable in societies with high social mobility: when the median voter expects to move up (respectively down), she would prefer to give less voice to poorer (respectively richer) social groups. Our theoretical analysis shows that in the presence of social mobility, the political preferences of an individual depend on the potentially conflicting preferences of her "future selves," and that the evolution of institutions is determined through the implicit interaction between occupants of the same social niche at different points in time. When social mobility is endogenized, our model identifies new political economic forces limiting the amount of mobility in society - because the middle class will lose out from mobility at the bottom and because a peripheral coalition between the rich and the poor may oppose mobility at the top.
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Capuchin monkeys punish those who have more
Kristin Leimgruber, Alexandra Rosati & Laurie Santos
Evolution and Human Behavior, May 2016, Pages 236-244
Abstract:
Punishment of non-cooperators is important for the maintenance of large-scale cooperation in humans, but relatively little is known about the relationship between punishment and cooperation across phylogeny. The current study examined second-party punishment behavior in a nonhuman primate species known for its cooperative tendencies - the brown capuchin monkey (Cebus apella). We found that capuchins consistently punished a conspecific partner who gained possession of a food resource, regardless of whether the unequal distribution of this resource was intentional on the part of the partner. A non-social comparison confirmed that punishment behavior was not due to frustration, nor did punishment stem from increased emotional arousal. Instead, punishment behavior in capuchins appears to be decidedly social in nature, as monkeys only pursued punitive actions when such actions directly decreased the welfare of a recently endowed conspecific. This pattern of results is consistent with two features central to human cooperation: spite and inequity aversion, suggesting that the evolutionary origins of some human-like punitive tendencies may extend even deeper than previously thought.