Wealth Inequality and Democracy
Kenneth Scheve & David Stasavage
Annual Review of Political Science, 2017, Pages 451-468
What do we know about wealth inequality and democracy? Our review shows that the simple conjectures that democracy produces wealth equality and that wealth inequality leads to democratic failure are not supported by the evidence. Why are democracy and high levels of wealth inequality sustainable together? Three key features of democratic politics can make this outcome possible. When societies are divided along cleavages other than wealth, this can inhibit the adoption of wealth-equalizing policies. Likewise, voter preferences for the redistribution of wealth depend on the beliefs they form about the fairness of these measures, and some voters without wealth may feel that redistribution is unfair. Finally, wealth-equalizing policies may be absent if the democratic process is captured by the rich; however, the evidence explaining when, where, and why capture accounts for variation in wealth inequality is less convincing than is often claimed. This phenomenon is a useful avenue for future research.
Lifetime Incomes in the United States over Six Decades
Fatih Guvenen et al.
NBER Working Paper, April 2017
Using panel data on individual labor income histories from 1957 to 2013, we document two empirical facts about the distribution of lifetime income in the United States. First, from the cohort that entered the labor market in 1967 to the cohort that entered in 1983, median lifetime income of men declined by 10%-19%. We find little-to-no rise in the lower three-quarters of the percentiles of the male lifetime income distribution during this period. Accounting for rising employer-provided health and pension benefits partly mitigates these findings but does not alter the substantive conclusions. For women, median lifetime income increased by 22%-33% from the 1957 to the 1983 cohort, but these gains were relative to very low lifetime income for the earliest cohort. Much of the difference between newer and older cohorts is attributed to differences in income during the early years in the labor market. Partial life-cycle profiles of income observed for cohorts that are currently in the labor market indicate that the stagnation of lifetime incomes is unlikely to reverse. Second, we find that inequality in lifetime incomes has increased significantly within each gender group. However, the closing lifetime gender gap has kept overall lifetime inequality virtually flat. The increase within gender groups is largely attributed to an increase in inequality at young ages, and partial life-cycle income data for younger cohorts indicate that the increase in inequality is likely to continue. Overall, our findings point to the substantial changes in labor market outcomes for younger workers as a critical driver of trends in both the level and inequality of lifetime income over the past 50 years.
The Altruistic Rich? Inequality and Other-Regarding Preferences for Redistribution
Matthew Dimick, David Rueda & Daniel Stegmueller
Quarterly Journal of Political Science, Winter 2017, Pages 385-439
What determines support among individuals for redistributive policies? Do individuals care about others when they assess the consequences of redistribution? This article proposes a model of other-regarding preferences for redistribution, which we term income-dependent altruism. Our model predicts that an individual's preferred level of redistribution is decreasing in income, increasing in inequality, and, more importantly, that the inequality effect is increasing in income. Thus, even though the rich prefer less redistribution than the poor, the rich are more responsive, in a positive way, to changes in inequality than are the poor. We contrast these results with several other prominent alternatives of other-regarding behavior. Using data for the United States from 1978 to 2010, we find significant support for our claims.
Economic inequality increases risk taking
Keith Payne, Jazmin Brown-Iannuzzi & Jason Hannay
Proceedings of the National Academy of Sciences, 2 May 2017, Pages 4643-4648
Rising income inequality is a global trend. Increased income inequality has been associated with higher rates of crime, greater consumer debt, and poorer health outcomes. The mechanisms linking inequality to poor outcomes among individuals are poorly understood. This research tested a behavioral account linking inequality to individual decision making. In three experiments (n = 811), we found that higher inequality in the outcomes of an economic game led participants to take greater risks to try to achieve higher outcomes. This effect of unequal distributions on risk taking was driven by upward social comparisons. Next, we estimated economic risk taking in daily life using large-scale data from internet searches. Risk taking was higher in states with greater income inequality, an effect driven by inequality at the upper end of the income distribution. Results suggest that inequality may promote poor outcomes, in part, by increasing risky behavior.
Are individualistic societies less equal? Evidence from the parasite stress theory of values
Boris Nikolaev, Christopher Boudreaux & Rauf Salahodjaev
Journal of Economic Behavior & Organization, June 2017, Pages 30-49
It is widely believed that individualistic societies, which emphasize personal freedom, award social status for accomplishment, and favor minimal government intervention, are more prone to higher levels of income inequality compared to more collectivist societies, which value conformity, loyalty, and tradition and favor more interventionist policies. The results in this paper, however, challenge this conventional view. Drawing on a rich literature in biology and evolutionary psychology, we test the provocative Parasite Stress Theory of Values, which suggests a possible link between the historical prevalence of infectious diseases, the cultural dimension of individualism-collectivism and differences in income inequality across countries. Specifically, in a two-stage least squares analysis, we use the historical prevalence of infectious diseases as an instrument for individualistic values, which, in the next stage, predict the level of income inequality, measured by the net GINI coefficient from the Standardized World Income Inequality Database (SWIID). Our findings suggest that societies with more individualistic values have significantly lower net income inequality. The results are robust even after controlling for a number of confounding factors such as economic development, legal origins, religion, human capital, other cultural values, economic institutions, and geographical controls.
Growing Apart: The Changing Firm-Size Wage Premium and Its Inequality Consequences
Adam Cobb & Ken-Hou Lin
Organization Science, forthcoming
Wage inequality in the United States has risen dramatically over the past few decades, prompting scholars to develop a number of theoretical accounts for the upward trend. This study argues that large firms have been a prominent labor-market institution that mitigates inequality. By compensating their low- and middle-wage employees with a greater premium than their higher-wage counterparts, large U.S. firms reduced overall wage dispersion. Yet, broader changes to employment relations associated with the demise of internal labor markets and the emergence of alternative employment arrangements have undermined large firms' role as an equalizing institution. Using data from the Current Population Survey and the Survey of Income and Program Participation, we find that in 1989, although all private-sector workers benefited from a firm-size wage premium, the premium was significantly higher for individuals at the lower end and middle of the wage distribution compared to those at the higher end. Between 1989 and 2014, the average firm-size wage premium declined markedly. The decline, however, was exclusive to those at the lower end and middle of the wage distribution, while there was no change for those at the higher end. As such, the uneven declines in the premium across the wage spectrum could account for about 20% of rising wage inequality during this period, suggesting that firms are of great importance to the study of rising inequality.
These Unequal States: Corporate Organization and Income Inequality in the United States
Adam Cobb & Flannery Stevens
Administrative Science Quarterly, June 2017, Pages 304-340
In an analysis of data on employment in the 48 contiguous United States from 1978 to 2008, we examine the connection between organizational demography and rising income inequality at the state level. Drawing on research on social comparisons and firm boundaries, we argue that large firms are susceptible to their employees making social comparisons about wages and that firms undertake strategies, such as wage compression, to help ameliorate their damaging effects. We argue that wage compression affects the distribution of wages throughout the broader labor market and that, consequently, state levels of income inequality will increase as fewer individuals in a state are employed by large firms. We hypothesize that the negative relationship between large-firm employment and income inequality will weaken when large employers are more racially diverse and their workers are dispersed across a greater number of establishments. Our results show that as the number of workers in a state employed by large firms declines, income inequality in that state increases. When these firms are more racially diverse, however, the negative relationship between large-firm employment and income inequality weakens. These results point to the importance of considering how corporate demography influences the dispersion of wages in a labor market.
The Dynamics of Capital Accumulation in the US: Simulations after Piketty
Philippe De Donder & John Roemer
Journal of Economic Inequality, June 2017, Pages 121-141
We develop a dynamic model where a competitive firm uses labor and capital, with market clearing rates of return. Individuals are heterogeneous in skills, with an endowment in capital/wealth increasing in skill. Individuals aspire to a socially determined consumption level, with a constant marginal propensity to consume out of income above this level. We also study three variants of the model: one with a higher rate of return for large capitals than for smaller ones, one with a capital levy financing a lump sum transfer, and one with social mobility. We calibrate the model to the US economy and obtain that a steady state exists in all variants, and we obtain convergence to the steady state from the 2012 US wealth distribution. The reduction in the level of the aspirational consumption level is the only way to create wealth for the bottom half of the distribution.
Share the Wealth: Redistribution Can Increase Economic Efficiency
Peter DeScioli, Alex Shaw & Andrew Delton
Political Behavior, forthcoming
People frequently face uncertain income and the threat of loss can inhibit economic investments. Government redistribution can insure citizens against economic losses, but its effect on people's investment decisions depends on how they react to redistributive rules. We apply methods from experimental economics to study how a redistributive institution affects people's investment decisions. Experiment 1 tests whether redistribution can increase economic efficiency when people face risk problems - investment opportunities that are profitable on average but could result in a loss. In a between-subject design, participants decide whether to make a risky investment either individually or under an institution that redistributes earnings equally among four group members. We find greater investment and profits when participants are required to share their earnings. In Experiment 2, we examine free-riding by comparing an institution that allows non-investors to exploit investors to an assortment institution that matches investors with investors. We find that vulnerability to free-riding suppresses investment, whereas an assortment mechanism increases investment by preventing free-riding and thereby facilitating risk pooling.
Why people prefer unequal societies
Christina Starmans, Mark Sheskin & Paul Bloom
Nature Human Behaviour, April 2017
There is immense concern about economic inequality, both among the scholarly community and in the general public, and many insist that equality is an important social goal. However, when people are asked about the ideal distribution of wealth in their country, they actually prefer unequal societies. We suggest that these two phenomena can be reconciled by noticing that, despite appearances to the contrary, there is no evidence that people are bothered by economic inequality itself. Rather, they are bothered by something that is often confounded with inequality: economic unfairness. Drawing upon laboratory studies, cross-cultural research, and experiments with babies and young children, we argue that humans naturally favour fair distributions, not equal ones, and that when fairness and equality clash, people prefer fair inequality over unfair equality. Both psychological research and decisions by policymakers would benefit from more clearly distinguishing inequality from unfairness.
Economic Change and Class Conflict over Tax Attitudes: Evidence from Nine Advanced Capitalist Democracies
Social Forces, June 2017, Pages 1509-1538
Do economic downturns induce class conflict over tax attitudes? Previous research casts doubt on this possibility and suggests that economic change exerts a minimal influence on welfare attitudes. Yet most of this research focuses on aggregate preferences, which potentially obscures important changes taking place at the level of social class. This study uses cross-national and temporal variation in unemployment rates as an empirical point of leverage to examine how unemployment rates influence class conflict over tax attitudes. The analysis combines individual-level data on tax attitudes (from different modules of the International Social Survey Programme) with country-level data on unemployment rates (from the Organization for Economic Cooperation and Development) to create a dataset with information on both individuals' tax attitudes and larger unemployment rates. Findings from two-way fixed-effects logistic regression models indicate that rising unemployment induces class-based change in tax attitudes. High-level professionals and managers respond to rising unemployment by withdrawing support for raising tax progressivity. By contrast, manual workers (along with low-level professionals and managers) respond to rising unemployment by increasing their support for tax progressivity. The results are observed across two different data sources. The study suggests that economic changes can foster class polarization in political attitudes.
The Double One Percent: Identifying an Elite and a Super-Elite Using the Joint Distribution of Income and Net Worth
Lisa Keister & Hang Young Lee
Research in Social Stratification and Mobility, forthcoming
Growing inequality has heightened awareness of those at the top of the income and wealth distributions, and researchers are beginning to acknowledge the need for a way to identify top households that simultaneously accounts for their income and net worth. We contribute to the literatures on top income and wealth households by introducing a measure of top status that includes a larger number of affluent households and that explicitly accounts for the interrelationship between income and wealth. Our innovation is to start with both income and wealth holders and to divide the top into three groups: those who are top income only, those who are top net worth only, and those who are at the top of both distributions (the double one percent). Our results show that the top three groups are unique financially and demographically in ways that inform understanding of inequality and the processes that lead to membership in top income and wealth positions. Perhaps most importantly, our results identify those who are merely elite and those who occupy even more exclusive, or super elite, positions at the top of both the income and wealth distributions.
Financialization, Income Inequality, and Redistribution in 18 Affluent Democracies, 1981-2011
Allen Hyde, Todd Vachon & Michael Wallace
Social Currents, forthcoming
In recent decades, the growth of finance and rising income inequality has become a pervasive feature of the political economies in affluent capitalist democracies. This study investigates the long-run effects of financialization on three measures of income inequality - market-generated income inequality, redistribution, and state-mediated income inequality - in 18 affluent capitalist democracies from 1981 to 2011. We focus on three aspects of financialization (finance, insurance, and real estate employment; credit expansion; and financial crises). We find support for our claims that all three measures of financialization increase market-generated and state-mediated income inequality. The results for redistribution are mixed: credit expansion decreases redistribution as expected, but financial crises increase redistribution - a finding that supports the welfare state stabilization hypothesis.
Where Credit is Due: The Relationship between Family Background and Credit Health
Sarena Goodman, Alice Henriques & Alvaro Mezza
Federal Reserve Working Paper, March 2017
Using a novel dataset that links an individual's background, education, and federal financial aid participation to her future credit records, we document that, even though it is not, and cannot be, used by credit agencies in assigning risk, family background is a strong predictor of early-career credit health (that is, an individual's credit score when she is around 30 years old). This relationship persists even after controlling for achievement, a range of postsecondary schooling variables (e.g., educational attainment, institutional quality, undergraduate borrowing), and key elements of early credit histories (e.g., default on educational loans). Interestingly, undergraduate borrowing, which is not underwritten, correlates with background and appears to explain some of the difference in scores. In light of the many important contexts in which credit scores are relied upon to evaluate consumers (e.g., lending, insurance, employment), our study offers a new dimension in understanding the transmission of socioeconomic status across generations.
For Richer or Poorer: The Politics of Redistribution in Bad Economic Times
Elizabeth Rigby & Megan Hatch
Political Research Quarterly, forthcoming
This paper examines the consequences of economic downturns for states' redistributive politics. We track state policies from 1980 through 2010 and illustrate how economic downturns led states to adopt budget-balancing policies by suppressing both the increased spending on programs benefiting the poor otherwise expected under Democratic Party control and the tax cuts for the wealthy otherwise expected under Republican Party control. We also undertake a natural experiment case study - comparing the forty Democratic and Republican governors in office right before (2007-2008) and after (2009-2010) the onset of the Great Recession. We find that Republican governors were less likely to propose spending and increased calls for spending cuts; yet, no similar shift in tax proposals was evident with continued calls for tax cuts to the wealthy. Democratic governors exhibited a similar pattern, but were less responsive and more likely to maintain their earlier policy proposals even after a significant downturn in the national economy. Together, these findings highlight how economic and political conditions interact with one another to shape "who gets what, when, and how from government," as well as clarify that we must ask and answer these questions separately for taxing and spending to capture the complex politics of redistribution.
Did the American Dream Kill the Social Safety Net? Evidence from Experiment and Survey Data
MIT Working Paper, March 2017
This paper examines the claim that housing wealth reduces support for social insurance. Homeowners who rely on their housing wealth for retirement or view their home as their private rainy day fund may become less supportive of social insurance programs that benefit all strata of society. However, it is also known that the effects of material self-interest on policy preferences are cognitively narrow, and well-identified studies show no effect of wealth on attitudes toward income redistribution. This paper presents two studies that explore the effect of home values on support for social insurance. A survey experiment, in which information about historical home price appreciation (HPA) is randomly assigned to respondents, finds homeowners informed that historical HPA has been high are about 8 percentage points more likely to prefer existing Social Security arrangements to a privatized Social Security scheme, compared to those informed that HPA has been low. I find no statistically detectable effect on various measures of support for social insurance among renters. An analysis of ANES panel data finds that homeowners who experience HPA in the highest quartile are neither more nor less likely to support status quo spending on Social Security than those in the middle quartiles. However, those who experience HPA in the lowest quartile are about 12 percentage points less likely to be satisfied with the status quo than all other homeowners. The evidence suggests that housing wealth gains, rather than reducing support for Social Security, increase preference for the status quo. I organize these results by drawing on existing findings in political behavior and behavioral economics, in particular research on narrow framing, mental accounting, and prospect theory.
The political class and redistributive policies
Alejandro Corvalan, Pablo Querubin & Sergio Vicente
NYU Working Paper, August 2016
We study the effect of the composition of the political class on the size of government. First, we use a citizen-candidate model to show that the extension of suffrage may be inconsequential for government spending when there are pre-existing stricter requirements for holding office. We then test this prediction empirically using data from the 13 U.S. original colonies. We find that the extension of the franchise did not affect government spending or the composition of the political class. However, the subsequent elimination of economic qualifications to hold office increased government spending and enriched the class heterogeneity of state legislatures.
Preferences for Relative Consumption: Revealed-Preference Estimates from an Experiment in the National Residency Match Program
Nicolas Bottan & Ricardo Perez-Truglia
University of California Working Paper, March 2017
We provide unique revealed-preference evidence that, in addition to their absolute level of consumption, individuals care about their relative consumption. We conducted a field experiment with 1,100 medical students participating in the National Residency Match Program (NRMP). We elicited perceptions about their potential absolute and relative consumption in the cities where their top-two programs are located, and study the effect of those perceptions on the ranking order submissions to the NRMP. To identify the causal effects of these perceptions, we generated exogenous variation through an information-provision experiment. The evidence suggests substantial positional externalities: on average, individuals are willing to give up 0.91 percent of absolute consumption in order to gain 1 percent in relative consumption. Moreover, we find substantial heterogeneity in relative concerns across individuals.
Consumption Inequality and the Frequency of Purchases
Olivier Coibion, Yuriy Gorodnichenko & Dmitri Koustas
NBER Working Paper, April 2017
We document a decline in the frequency of shopping trips in the U.S. since 1980 and consider its implications for the measurement of consumption inequality. A decline in shopping frequency as households stock up on storable goods (i.e. inventory behavior) will lead to a rise in expenditure inequality when the latter is measured at high frequency, even when underlying consumption inequality is unchanged. We find that most of the recently documented rise in expenditure inequality in the U.S. since the 1980s can be accounted for by this phenomenon. Using detailed micro data on spending which we link to data on club/warehouse store openings, we directly attribute much of the reduced frequency of shopping trips to the rise in club/warehouse stores.
Is sociopolitical egalitarianism related to bodily and facial formidability in men?
Michael Price et al.
Evolution and Human Behavior, forthcoming
Social bargaining models predict that men should calibrate their egalitarian attitudes to their formidability and/or attractiveness. A simple social bargaining model predicts a direct negative association between formidability/attractiveness and egalitarianism, whereas a more complex model predicts an association moderated by wealth. Our study tested both models with 171 men, using two sociopolitical egalitarianism measures: social dominance orientation and support for redistribution. Predictors included bodily formidability and attractiveness and four facial measures (attractiveness, dominance, masculinity, and width-to-height ratio). We also controlled for time spent lifting weights, and experimentally manipulated self-perceived formidability in an attempt to influence egalitarianism. Both the simple and complex social bargaining models received partial support: sociopolitical egalitarianism was negatively related to bodily formidability, but unrelated to other measures of bodily/facial formidability/attractiveness; and a formidability-wealth interaction did predict variance in support for redistribution, but the nature of this interaction differed somewhat from that reported in previous research. Results of the experimental manipulation suggested that egalitarianism is unaffected by self-perceived formidability in the immediate short-term. In sum, results provided some support for both the simple and complex social bargaining models, but suggested that further research is needed to explain why male formidability/attractiveness and egalitarianism are so often negatively related.
Can an Oil-Rich Economy Reduce its Income Inequality? Empirical Evidence from Alaska's Permanent Fund Dividend
Kate Kozminski & Jungho Baek
Energy Economics, June 2017, Pages 98-104
The main focus of this paper is to empirically examine the effect of the Permanent Fund Dividend (PFD) payouts on Alaska's income inequality by taking into account the roles of income and population. To that end, an autoregressive distributed lag (ARDL) approach to cointegration and the Johansen cointegration approach are applied to annual time series data from 1963 to 2012. We find that the PFD payouts tend to worsen income inequality in Alaska in both the short- and long-run. We also provide evidence to support the existence of Kuznets' hypothesis for Alaska - growth deteriorates income inequality initially and improves it later. Finally, population is found to reduce Alaska's income inequality in the short- and long-run.