Fat Tails
Income Inequality and Ideological Positions in the U.S. Congress
Jeffrey Ladewig
Political Research Quarterly, forthcoming
Abstract:
Over the past twenty years, there has been much discussion about two of the most important recent trends in American politics: the increase in income inequality in the United States and the increase in ideological and partisan polarization, particularly in the U.S. House. These two national-level trends are commonly thought to be positively related. But, there are few tested theoretical connections between them, and it is potentially problematic to infer individual-level behavior from these aggregate-level trends. In fact, an examination of the literature reveals, at least, three different theoretical outcomes for district-level income inequality on voter and congressional ideological positions. I explore these district-level theoretical and empirical possibilities as well as test them over decades with three different measures of income inequality. I argue and demonstrate that higher district levels of income inequality are related to higher levels of ideological liberalism in the U.S. House. This stands in contrast to the national-level trends, but it tracks closely to traditional understandings of congressional behavior.
The expanding class divide in happiness in the United States, 1972–2016
Jean Twenge & Bell Cooper
Emotion, forthcoming
Abstract:
Is there a growing class divide in happiness? Among U.S. adults ages 30 and over in the nationally representative General Social Survey (N = 44,198), the positive correlation between socioeconomic status (SES; including income, education, and occupational prestige) and happiness grew steadily stronger between the 1970s and 2010s. Associations between income and happiness were linear, with no tapering off at higher levels of income. Between 1972 and 2016, the happiness of high-SES White adults was fairly stable, whereas the happiness of low-SES White adults steadily declined. Among Black adults, the happiness of low-SES adults was fairly stable, whereas the happiness of high-SES adults increased. Thus, the happiness advantage favoring high-SES adults has expanded over the decades. Age–period–cohort analyses based on hierarchical linear modeling demonstrate that this effect is primarily caused by time period rather than by birth cohort or age.
Income Inequality Reduces Civic Honesty
Hongfei Du et al.
Social Psychological and Personality Science, forthcoming
Abstract:
Income inequality has been shown to have a detrimental impact on a wide range of psychological, economic, and social outcomes. In this study, we focus on the role of income inequality in reducing civic honesty. Study 1 reanalyzed data of a “lost wallet” experiment conducted by Cohn, Maréchal, Tannenbaum, and Zuünd (2019) in 355 cities spread across 40 countries. Multilevel analyses indicated that citizens in countries with higher income inequality were less likely to return a lost wallet. Study 2 examined the causal effects of income inequality by utilizing an experimental design. We found that income inequality reduced one’s personal desire to return a lost wallet. Convergent findings from two studies indicate the crucial role played by income inequality in reducing civic honesty.
An Inconvenient Fact: Private Equity Returns & The Billionaire Factory
Ludovic Phalippou
Journal of Investing, forthcoming
Abstract:
Private Equity (PE) funds have returned about the same as public equity indices since at least 2006. Large public pension funds have received a net Multiple of Money (MoM) that sits within a narrow 1.51 to 1.54 range. The big four PE firms have also delivered estimated net MoMs within a narrow 1.54 to 1.67 range. Three large datasets show average net MoMs across all PE funds at 1.55, 1.57 and 1.63. These net MoMs imply an 11% p.a. return, which matches relevant public equity indices; a result confirmed by PME calculations. Yet, the estimated total performance-related fee collected by these PE funds is estimated to be $230 billion, most of which goes to a relatively small number of individuals. The number of PE multibillionaires rose from 3 in 2005 to over 22 in 2020. Rebuttals from the big four and the main industry lobby body are provided and discussed.
Social Class Competence Stereotypes Are Amplified by Socially Signaled Economic Inequality
Paul Connor et al.
Personality and Social Psychology Bulletin, forthcoming
Abstract:
A number of psychological theories suggest that increased economic inequality may lead to greater social class stereotyping. However, all existing evidence for this claim is correlational. Across three experiments (one exploratory and two confirmatory, N = 2,286), we observed that exposure to socially signaled inequality — operationalized in terms of variation in perceived incomes among groups of target individuals — amplified the endorsement of one key social class stereotype: the perception that higher income individuals are more competent. When judged amid greater inequality, the same high-income targets were perceived as more competent and the same low-income targets were perceived as less competent, compared with when judged amid greater equality. By contrast, we found no consistent effect of exposure to inequality on stereotypes regarding warmth and relatively weak class-based stereotyping on the warmth dimension in general. We discuss implications of these findings for theories regarding the effects of economic inequality.
Inequality in socially permissible consumption
Serena Hagerty & Kate Barasz
Proceedings of the National Academy of Sciences, 23 June 2020, Pages 14084-14093
Abstract:
Lower-income individuals are frequently criticized for their consumption decisions; this research examines why. Eleven preregistered studies document systematic differences in permissible consumption — interpersonal judgments about what is acceptable (or not) for others to consume — such that lower-income individuals’ decisions are subject to more negative and restrictive evaluations. Indeed, the same consumption decisions may be deemed less permissible for a lower-income individual than for an individual with higher or unknown income (studies 1A and 1B), even when purchased with windfall funds. This gap persists among participants from a large, nationally representative sample (study 2) and when testing a broad array of “everyday” consumption items (study 3). Additional studies investigate why: The same items are often perceived as less necessary for lower- (versus higher-) income individuals (studies 4 and 5). Combining both permissibility and perceived necessity, additional studies (studies 6 and 7) demonstrate a causal link between the two constructs: A purchase decision will be deemed permissible (or not) to the extent that it is perceived as necessary (or not). However, because — for lower-income individuals — fewer items are perceived as necessary, fewer are therefore socially permissible to consume. This finding not only exposes a fraught double standard, but also portends consequential behavioral implications: People prefer to allocate strictly “necessary” items to lower-income recipients (study 8), even if such items are objectively and subjectively less valuable (studies 9A and 9B), which may result in an imbalanced and inefficient provision of resources to the poor.
Shifting attributions for poverty motivates opposition to inequality and enhances egalitarianism
Paul Piff et al.
Nature Human Behaviour, May 2020, Pages 496–505
Abstract:
Amidst rising economic inequality and mounting evidence of its pernicious social effects, what motivates opposition to inequality? Five studies (n = 34,442) show that attributing poverty to situational forces is associated with greater concern about inequality, preference for egalitarian policies and inequality-reducing behaviour. In Study 1, situational attributions for poverty were associated with reduced support for inequality across 34 countries. Study 2 replicated these findings with a nationally representative sample of Americans. Three experiments then tested whether situational attributions for poverty are malleable and motivate egalitarianism. Bolstering situational attributions for poverty through a writing exercise (Study 3) and a computer-based poverty simulation (Studies 4a and b) increased egalitarian action and reduced support for inequality immediately (Studies 3 and 4b), 1 d later and 155 d post-intervention (Study 4b). Causal attributions for poverty offer one accessible means of shaping inequality-reducing attitudes and actions. Situational attributions may be a potent psychological lever for lessening societal inequality.
Inequality and Social Rank: Income Increases Buy More Life Satisfaction in More Equal Countries
Edika Quispe-Torreblanca et al.
Personality and Social Psychology Bulletin, forthcoming
Abstract:
How do income and income inequality combine to influence subjective well-being? We examined the relation between income and life satisfaction in different societies, and found large effects of income inequality within a society on the relationship between individuals’ incomes and their life satisfaction. The income–satisfaction gradient is steeper in countries with more equal income distributions, such that the positive effect of a 10% increase in income on life satisfaction is more than twice as large in a country with low income inequality as it is in a country with high income inequality. These findings are predicted by an income rank hypothesis according to which life satisfaction is derived from social rank. A fixed increment in income confers a greater increment in social position in a more equal society. Income inequality may influence people’s preferences, such that in unequal countries people’s life satisfaction is determined more strongly by their income.
Signaling Status: The Impact of Relative Income on Household Consumption and Financial Decisions
Jesse Bricker, Jacob Krimmel & Rodney Ramcharan
Management Science, forthcoming
Abstract:
This paper investigates the importance of status in household consumption and credit decisions using data from the Survey of Consumer Finances linked to tract-level data in the American Community Survey. We find that relatively richer households in the census tract use more debt and spend more on high-status cars. Also, county-level evidence shows that the consumption of high-status cars is higher in more unequal counties. These results suggest that greater income heterogeneity might shape household consumption and credit decisions, as relatively richer households signal their higher status to their neighbors through the consumption of visible status goods.
The Evolution of the US Family Income‐Schooling Relationship and Educational Selectivity
Christian Belzil & Jörgen Hansen
Journal of Applied Econometrics, forthcoming
Abstract:
We estimate a dynamic model of schooling on two cohorts of the NLSY and find that, contrary to conventional wisdom, the effects of real (as opposed to relative) family income on education have practically vanished between the early 1980's and the early 2000's. After conditioning on a cognitive ability measure (AFQT), family background variables and unobserved heterogeneity (allowed to be correlated with observed characteristics), income effects vary substantially with age and have lost between 30% and 80% of their importance on age‐specific grade progression probabilities. After conditioning on observed and unobserved characteristics, a $300,000 differential in family income generated more than 2 years of education in the early 1980's, but only one year in the early 2000's. Put differently, a $70,000 differential raised college participation by 10 percentage points in the early 1980's. In the early 2000's, a $330,000 income differential had the same impact. The effects of AFQT scores have lost about 50% of their magnitude but did not vanish. Over the same period, the relative importance of unobserved heterogeneity has expanded significantly, thereby pointing toward the emergence of a new form of educational selectivity reserving an increasing role to non‐cognitive abilities and/or preferences and a lesser role to cognitive ability and family income.
I ain’t no fortunate one: On the motivated denial of class privilege
Taylor Phillips & Brian Lowery
Journal of Personality and Social Psychology, forthcoming
Abstract:
Invisibility makes privilege powerful. Especially when it remains unexposed, privilege perpetuates inequity by giving unearned advantages to certain groups over others. However, recent social movements (e.g., Occupy) attempt to expose class-based privilege, threatening its invisibility. Across 8 experiments, we show that beneficiaries of class privilege respond to such exposure by increasing their claims of personal hardships and hard work, to cover privilege in a veneer of meritocracy. Experiments 1a–c show that when people are provided evidence of their own class privilege, they claim to have suffered more personal life hardships. Experiment 2 suggests that these claims are driven in part by threats to self-regard. Experiment 3 finds that such self-defense is motivated specifically by a desire to attribute positive outcomes to the self (i.e., sense of personal merit). When given the chance to first bolster their sense of personal merit, those benefitting from privilege no longer claim hardships in response to evidence of privilege. Experiments 4 and 5 further suggest self-concerns are at play: only self-relevant privilege evokes defensive responses, and self-affirmation reduces hardship claims more than does system-affirmation. Finally, Experiment 6 suggests that people claim hardships because they believe these imply personal merit on their part. Preventing the privileged from claiming hardship leads them to claim increased effort in the workplace and to increase effort on a difficult task. Overall, results suggest that even when those benefitting from class privileges are confronted with evidence of their “invisible knapsack,” ideologies of personal merit help them cover the privileges of class once again.
Happy Lottery Winners and LT Bias
Seonghoon Kim & Andrew Oswald
Review of Income and Wealth, forthcoming
Abstract:
The world spends a remarkable $250 billion a year on lottery tickets. Yet, perplexingly, it has proved difficult for social scientists to show that lottery windfalls actually make people happier. This is the famous and still unresolved paradox due initially to Brickman and colleagues. Here we describe an underlying weakness that has affected the research area, and explain the concept of lottery‐ticket bias (LT bias), which stems from unobservable lottery spending. We then collect new data — in the world’s most intense lottery‐playing nation, Singapore — on the amount that people spend on lottery tickets (n = 5626). We demonstrate that, once we correct for LT bias, a lottery windfall is predictive of a substantial improvement in happiness and well‐being.
Income-driven Labor Market Polarization
Diego Comin, Ana Danieli & Martí Mestier
NBER Working Paper, June 2020
Abstract:
We propose a mechanism for labor-market polarization based on the nonhomotheticity of demand that we call the income-driven channel. Our mechanism builds on a novel empirical fact: expenditure elasticities and production intensities in low- and high-skill occupations are positively correlated across sectors. Thus, as income grows, demand shifts towards expenditure-elastic sectors, and the relative demand for low- and high-skill occupations increases, causing labor-market polarization. A calibrated general-equilibrium model suggests this mechanism accounts for 90% and 35% of the increase in the wage-bill share of low- and high-skill occupations observed in the US during 1980-2016, and for 64% and 28% of the rise in the employment shares of low- and high-skill occupations. This mechanism is similarly important for the polarization of labor markets in Western Europe during 1980-2016, as well as in the US during earlier decades and, possibly, the near future.
The social context of nearest neighbors shapes educational attainment regardless of class origin
Finn Hedefalk & Martin Dribe
Proceedings of the National Academy of Sciences, 30 June 2020, Pages 14918-14925
Abstract:
We study the association between sociospatial neighborhood conditions throughout childhood and educational attainment in adulthood. Using unique longitudinal microdata for a medium-sized Swedish town, we geocode its population at the address level, 1939 to 1967, and link individuals to national registers, 1968 to 2015. Thus, we adopt a long-term perspective on the importance of nearby neighbors during a period when higher education expanded. Applying a method for estimating individual neighborhoods at the address level, we analyze the association between the geographically weighted social class of the nearest 6 to 100 childhood neighbors (ages 2 to 17), and the likelihood of obtaining a university degree by age 40, controlling for both family social class and school districts. We show that even when growing up in a town with relatively low economic inequality, the social class of the nearest same-age neighbors in childhood was associated with educational attainment, and that the associations were similar regardless of class origin. Growing up in low-class neighborhoods lowered educational attainment; growing up in high-class neighborhoods increased attainment. Social class and neighborhoods reinforced each other, implying that high-class children clustered with each other had much higher odds of obtaining a university degree than low-class children from low-class neighborhoods. Thus, even if all groups benefited from the great expansion of free higher education in Sweden (1960s to 1970s), the large inequalities between the classes and neighborhoods remained unchanged throughout the period. These findings show the importance of an advantageous background, both regarding the immediate family and the networks of nearby people of the same age.
The Right to Work, Power Resources, and Economic Inequality
Tom VanHeuvelen
American Journal of Sociology, March 2020, Pages 1255-1302
Abstract:
How do right to work laws affect the distribution of economic resources? While sociological theories would predict inequality to increase following their passage, previous research finds these laws to be largely inconsequential. The author compiles a unique data set of 77 years of income and wage inequality data from the Internal Revenue Service, the U.S. census, the U.S. Union Sourcebook, and the National Labor Relations Board. After replicating inconsistent results from previous studies, the author shows that they mask substantial and robust heterogeneity across local areas. Right to work laws are consequential when passed in times and places where labor has something to lose. They remove the negative association between labor union membership and inequality, with the greatest consequences of right to work passage in highly unionized areas. In total, results suggest that right to work laws work as intended, increasing economic inequality indirectly by lowering labor power resources. Theoretical and policy implications are discussed.
How State Responses to Economic Crisis Shape Income Inequality and Financial Well-Being
William Franko
State Politics & Policy Quarterly, forthcoming
Abstract:
This study examines how state government responses to economic crisis, in the form of unexpected changes in state fiscal policy, influence income inequality. State governments are vital actors in times of fiscal stress as nearly every state must make difficult policy decisions related to taxes and spending to address budget deficits, both of which are policies that shape the income gap. Focusing on periods of fiscal stress is important for the study of state inequality as those with fewer resources are the most likely to experience the consequences of their state’s fiscal response during these times. Using time-series cross-sectional data, this research demonstrates that income inequality increases when states respond to economic crisis by relying on unexpected spending cuts. These effects tend to persist even after initial economic downturns. In addition, one individual-level implication of the aggregate relationship between state policy responses and inequality — that people will be worse off financially when their states emphasize budget cuts in response to economic decline — is assessed using several post–Great Recession surveys. The findings have implications for the future of inequality in the United States and provide potential paths for state fiscal reform.
A Political Model of Trust
Marina Agranov, Ran Eilat & Konstantin Sonin
University of Chicago Working Paper, April 2020
Abstract:
We analyze a simple model of political competition, in which the uninformed median voter chooses whether to follow or ignore the advice of the informed elites. In equilibrium, information transmission is possible only if voters trust the elites’ endorsement of potentially biased candidates. When inequality is high, the elites’ informational advantage is minimized by the voters’ distrust. When inequality reaches a certain threshold, the trust, and thus the information transmission, breaks down completely. Finally, the size of the elite forming in equilibrium depends on the amount of trust they are able to maintain.
A Privileged Point of View: Effects of Subjective Socioeconomic Status on Naïve Realism and Political Division
Jazmin Brown-Iannuzzi et al.
Personality and Social Psychology Bulletin, forthcoming
Abstract:
In the United States, both economic inequality and political conflict are on the rise. We investigated whether subjective socioeconomic status (SSS) may help explain why these dual patterns emerge. We hypothesized that higher SSS may increase naïve realism — the belief that one perceives the world as it is, rather than as interpreted through one’s own knowledge and beliefs — regarding political issues. Using a representative sample of the American electorate, we found that higher SSS predicted more political naïve realism toward those from a different political party (Study 1). The remaining experiments examined the causal relationship between SSS and political naïve realism (Studies 2–5). We extended these findings by investigating whether SSS influenced participants’ willingness to exclude those with contrary views from a vote (Studies 4 and 5). Together, these studies demonstrate that SSS enhances political naïve realism and can lead to the exclusion of others with contrary opinions.
Estimating the Marginal Propensity to Consume using the Distributions of Income, Consumption, and Wealth
Jonathan Fisher et al.
Journal of Macroeconomics, forthcoming
Abstract:
Studies of economic inequality almost always separately examine income, consumption, and wealth inequality, and hence, miss the important synergy amongst the three measures explicit in the life-cycle budget constraint. These joint distributions, however, are important in evaluating macroeconomic impacts of changes in income because the response may differ across the wealth distribution. This heterogeneity in the response to income changes can have significant impact on the effectiveness of government fiscal policy. Using the Panel Study of Income Dynamics from 1999-2013, we examine how the marginal propensity to consume (MPC) differs across the wealth distribution. We find that the MPC is lower at higher wealth quintiles, indicating that low wealth households cannot smooth consumption as much as other households. This implies that increasing wealth inequality likely reduces aggregate consumption, which, in turn, could limit economic growth.