Separate and unequal
De Gustibus non est Taxandum: Theory and Evidence on Preference Heterogeneity and Redistribution
Benjamin Lockwood & Matthew Weinzierl
NBER Working Paper, January 2012
Abstract:
Preferences over consumption and leisure play no role in the standard optimal tax model, which attributes all variation in earnings to differences in income-earning ability. We show how to incorporate these preferences, which like ability are publicly unobservable, into the standard model in a tractable way. In this more general model, the policy designer must guess at the relative importance of ability and preferences in explaining variation in earnings. We show that such preferences could, in principle, increase or decrease optimal redistribution. In the most plausible specifications of the model, however, the result is clear: greater variation in preferences lowers the optimal extent of redistribution. To generate more redistribution than in standard results, one must assume that the desire for income is inversely related to income earned. This result holds even when the conventional model accurately describes the average individual, and it suggests one potential resolution to the puzzle of why observed redistribution is in some cases weaker than conventional theory would suggest. We then establish a new empirical finding that confirms this model's central policy prediction across developed countries and U.S. states. In countries and states with more heterogeneous tastes for consumption relative to leisure, redistribution is statistically significantly lower.
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Financial Deprivation Prompts Consumers to Seek Scarce Goods
Eesha Sharma & Adam Alter
Journal of Consumer Research, forthcoming
Abstract:
Consumers assess their wellbeing subjectively, largely by comparing the present state of their lives to the state of comparable others and to their own state earlier in time. We suggest that consumers similarly assess their financial wellbeing, and when these evaluations highlight a deficit in their financial position, they pursue strategies that mitigate the associated sense of financial deprivation. Specifically, consumers counteract the relative deficit in their financial resources by acquiring resources that are consequently unavailable to other consumers in their environment. The results from five studies suggest that the inferiority and unpleasant affect associated with financial deprivation motivates consumers to attend to, choose, and consume scarce goods rather than comparable abundant goods. These effects diminish when scarce goods are limited because other people have already obtained them, and when consumers attribute their unpleasant feelings to an extraneous source.
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Democratic Legitimacy and Economic Liberty
John Tomasi
Social Philosophy and Policy, January 2012, Pages 50-80
Abstract:
Libertarians and classical liberals typically defend private economic liberty as a requirement of self-ownership or on the basis of consequentialist arguments of various sorts. By contrast, this paper defends private economic liberty as a requirement of democratic legitimacy. In recent decades, many philosophers have converged upon a certain view about political justification. If a set of social institutions is to be just and legitimate, those institutions must be acceptable in principle to the citizens who are to lead their lives within them. This deliberative or democratic approach to justification is traditionally associated with thinkers on the left who are skeptical of the importance of private economic liberty. This article shows how the protection of private economic liberty is a requirement of citizens' developing and exercising the moral powers they have as democratic citizens. Democratic legitimacy does not require the affirmation of absolute economic liberty rights as sometimes defended by libertarians. But democratic legitimacy does require that a wide range of private economic liberties be meriting constitutional protection on a par with the civil and political liberties of democratic citizens. This opens the way for a wider defense of classical liberalism based upon the idea of democratic legitimacy.
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Understanding the geography of food stamp program participation: Do space and place matter?
Tim Slack & Candice Myers
Social Science Research, March 2012, Pages 263-275
Abstract:
This study examines the extent to which geographic variation in Food Stamp Program (FSP) participation is explained by place-based factors, with special attention to the case of the three poorest regions of the United States: Central Appalachia, the Texas Borderland, and the Lower Mississippi Delta. We use descriptive statistics and regression models to assess the prevalence and correlates of county-level FSP participation circa 2005. Our findings show that the economic distress that has long characterized Appalachia, the Borderland, and the Delta clearly translates into greater reliance on the FSP relative to other areas of the country. State-level effects and local-level variations in poverty, labor market conditions, population structure, human capital, and residential context explain much of this reality. Yet, even after taking all of these factors into account, these regional geographies remain home to particularly high FSP participation. Our findings underscore the importance of considering these regions as key cases of study in the stratification of American society and hold a variety of implications for public policy.
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Saving Rates and Poverty: The Role of Conspicuous Consumption and Human Capital
Omer Moav & Zvika Neeman
Economic Journal, forthcoming
Abstract:
Poor families around the world spend a large fraction of their income consuming goods that do not appear to alleviate poverty, while saving at low rates. We suggest that individuals care about economic status and interpret this behaviour as conspicuous consumption intended to provide a signal about unobserved income. We show that if human capital is observable and correlated with income, then a signaling equilibrium in which poor individuals tend to spend a large fraction of their income on conspicuous consumption can emerge. This equilibrium gives rise to an increasing marginal propensity to save that might generate a poverty trap.
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Credit Access and Social Welfare: The Rise of Consumer Lending in the United States and France
Gunnar Trumbull
Politics & Society, March 2012, Pages 9-34
Abstract:
Research into the causes of the 2008 financial crisis has drawn attention to a link between growing income inequality in the United States and high household indebtedness. Most accounts trace the U.S. idea of credit-as-welfare to the period of wage stagnation and welfare retrenchment that began in the early 1970s. Using France as a comparison case, I argue that the link between credit and welfare was not unique to the United States. Indeed, U.S. charitable lending institutions that emerged at the beginning of the twentieth century were modeled in part on older French financial institutions. Three historical factors drove U.S. lenders and policymakers to push for expanded credit access for the working class. First, welfare reformers in the interwar period embraced private credit as an alternative to an expansive welfare state. Second, U.S. organized labor in the wake of World War II embraced credit access as a means to sustain industrial employment and finance strike actions. Third, commercial banks in the 1950s began offering revolving credit accounts as a means to attract new depositors at a time when banking regulation restricted the interest they could offer on deposits.
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Social Mobility in 20 Modern Societies: The Role of Economic and Political Context
Meir Yaish & Robert Andersen
Social Science Research, forthcoming
Abstract:
It is commonly argued that social mobility rates are influenced by economic and political conditions. Nevertheless, research on this issue has tended to be hindered by two limitations that make it difficult to draw strong conclusions about contextual effects: (1) seldom have country-level and individual-level influences been tested simultaneously, and (2) only rarely have data more recent than the 1970s been employed. We improve on previous research by employing multilevel models fitted to relatively recent survey data collected from 20 modern societies by the International Social Survey Program (ISSP) and national-level characteristics derived from various official sources. Our findings demonstrate systematic cross-national variation in the association between the occupational status of respondents and their fathers. Consistent with the industrialization thesis, this variation is positively associated with per-capita GDP, suggesting that more affluent nations are characterized by more open and fluid stratification structures. Our results also suggest the importance of political regimes and migration for social mobility. In contrast, economic inequality appears to explain very little of the cross-national variation in mobility rates.
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Income Inequality and Social Preferences for Redistribution and Compensation Differentials
William Kerr
NBER Working Paper, December 2011
Abstract:
In cross-sectional studies, countries with greater income inequality typically exhibit less support for government-led redistribution and greater acceptance of wage inequality (e.g., United States versus Western Europe). If individual nations evolve along this pattern, a vicious cycle could form with reduced social concern amplifying primal increases in inequality due to forces like skill-biased technical change. Exploring movements around these long-term levels, however, this study finds mixed evidence regarding the vicious cycle hypothesis. On one hand, larger compensation differentials are accepted as inequality grows. This growth in differentials is of a smaller magnitude than the actual increase in inequality, but it is nonetheless positive and substantial in size. Weighing against this, growth in inequality is met with greater support for government-led redistribution to the poor. These patterns suggest that short-run inequality shocks can be reinforced in the labor market but do not result in weaker political preferences for redistribution.
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Preschoolers are able to take merit into account when distributing goods
Nicolas Baumard, Oliver Mascaro & Coralie Chevallier
Developmental Psychology, forthcoming
Abstract:
Classic studies in developmental psychology demonstrate a relatively late development of equity, with children as old as 6 or even 8-10 years failing to follow the logic of merit - that is, giving more to those who contributed more. Following Piaget (1932), these studies have been taken to indicate that judgments of justice develop slowly and follow a stagelike progression, starting off with simple rules (e.g., equality: everyone receives the same) and only later on in development evolving into more complex ones (e.g., equity: distributions match contributions). Here, we report 2 experiments with 3- and 4-year-old children (N = 195) that contradict this constructivist account. Our results demonstrate that children as young as 3 years old are able to take merit into account by distributing tokens according to individual contributions but that this ability may be hidden by a preference for equality.
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Do Infants Have a Sense of Fairness?
Stephanie Sloane, Renée Baillargeon & David Premack
Psychological Science, forthcoming
Abstract:
Two experiments examined infants' expectations about how an experimenter should distribute resources and rewards to other individuals. In Experiment 1, 19-month-olds expected an experimenter to divide two items equally, as opposed to unequally, between two individuals. The infants held no particular expectation when the individuals were replaced with inanimate objects, or when the experimenter simply removed covers in front of the individuals to reveal the items (instead of distributing them). In Experiment 2, 21-month-olds expected an experimenter to give a reward to each of two individuals when both had worked to complete an assigned chore, but not when one of the individuals had done all the work while the other played. The infants held this expectation only when the experimenter could determine through visual inspection who had worked and who had not. Together, these results provide converging evidence that infants in the 2nd year of life already possess context-sensitive expectations relevant to fairness.
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Legitimacy of Inequality in a Highly Unequal Context: Evidence from the Chilean Case
Juan Carlos Castillo
Social Justice Research, December 2011, Pages 314-340
Abstract:
Economic inequality is usually assumed to be a threat to social cohesion and democracy. Nevertheless, this opposition of inequality and democracy is based on further assumptions such as (a) that people perceive economic inequality accurately, and (b) that, by and large they consider inequality unjust. Research into distributive issues has not found consistent support for neither of these assumptions. Quite the contrary, empirical evidence indicates that economic inequality is widely misperceived and that inequality is to some extent considered legitimate. So far most of the empirical evidence in the area of legitimacy comes from experimental studies in the developed world. The present research aims at widening the scope of legitimacy studies by focusing on Chile as a case country, one of the societies with the highest economic inequality worldwide, guided by the question to what extent is economic inequality considered legitimate in a context of high economic inequality? In addressing this question, and based on previous evidence, the article proposes a way to evaluate (a) the legitimacy of inequality at a country level via survey research, and (b) the role of inequality perception and justice ideologies in the justification of economic inequality. The data to be analyzed is the public opinion survey International Social Justice Project (ISJP), implemented in Chile in the year 2007 (n = 890). Multivariate analysis results reveal signs of legitimacy of inequality in Chile, opening a series of issues regarding the acceptance and stability of unequal distributions.
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The Polarizing Effect of Economic Inequality on Class Identification: Evidence from 44 Countries
Robert Andersen & Josh Curtis
Research in Social Stratification and Mobility, forthcoming
Abstract:
Using cumulative logit mixed models fitted to World Values Survey data from 44 countries, we explore the impact of economic conditions - both at the individual-level and the national-level - on social class identification. Consistent with previous research, we find a positive relationship between household income and class identification in all countries that we explore, though this relationship varies substantially. Also corroborating previous research, we find that ‘low' class identifications are more likely in poor countries than in rich ones. However, in contrast to previous research that has neglected the role of inequality, our results indicate that the effect of economic development diminishes if income inequality is considered in the same model. We further demonstrate that income inequality has an important polarizing effect on class identification. Specifically, the relationship between household income and class identity tends to be strongest in countries with a high level of income inequality.
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Is wealth accumulation a luxury good?
Kiichi Tokuoka
Economics Letters, forthcoming
Abstract:
This paper structurally estimates the Capitalist Spirit Model, in which utility derives from direct preferences for wealth. Its results support the hypothesis that wealth accumulation is a luxury good, by showing that the marginal utility from wealth declines more slowly than that from consumption.
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The Dynamic Interplay of Inequality and Trust - An Experimental Study
Ben Greiner, Axel Ockenfels & Peter Werner
Journal of Economic Behavior & Organization, February 2012, Pages 355-365
Abstract:
We study the interplay of inequality and trust in a dynamic growth game, in which trust increases efficiency and thus allows higher growth of the laboratory economy in the future. We find that trust (as measured by the percentage of wealth invested in a trust game) is initially high in a treatment starting with equal endowments, but decreases over time. In a treatment with unequal endowments, trust is initially lower yet more robust. The disparity of wealth distributions across economies mitigates over time. Our findings suggest that both the level and the (exogenous or endogenous) source of inequality matters for the dynamics of trust.
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Spend it like Beckham? Inequality and redistribution in the UK, 1983-2004
Andreas Georgiadis & Alan Manning
Public Choice, June 2012, Pages 537-563
Abstract:
A main activity of the state is to redistribute resources. Standard political economy models predict that a rise in inequality will lead to more redistribution. This paper shows that, for the UK in the period 1983-2004, a plausibly exogenous rise in income inequality has not been associated with increased redistribution. We explore this example of the ‘paradox of redistribution' using attitudinal data. We show that standard political economy models of the individual demand for redistribution do have explanatory power, but that other attitudes and beliefs are also very important. Moreover, these attitudes and beliefs change quite quickly so are very important in explaining variation in the demand for redistribution.
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Duangkamon Chotikapanich et al.
Review of Economics and Statistics, February 2012, Pages 52-73
Abstract:
Using a method-of-moments estimator, flexible three-parameter beta distributions are fitted to aggregate country-level income data to overcome an untenable assumption of previous studies that persons within each income group receive the same income. Regional and global income distributions are derived as weighted mixtures of country-specific distributions. Analytical expressions for Gini and Theil's measures of inequality at country, regional, and global levels are derived in terms of the parameters of the beta distributions. Application to data for 91 countries in 1993 and 2000 reveals a high degree of global inequality, with evidence of declining inequality, largely attributable to growth in China.
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The Devolution of Risk and the Changing Life Course in the United States
Angela O'Rand
Social Forces, September 2011, Pages 1-16
Abstract:
Recent patterns of labor exit in late life in the United States are increasingly heterogeneous. This heterogeneity stems from diverse employment careers that are emerging in the workplace where job security is declining. Individuals' structural locations in the labor market expose them to diverse risks for employment and income security at older ages. Among those risks are access to institutional mechanisms for retirement saving and the requirement to assume full responsibility for decisions about retirement savings that involve market risks. The spread of these individualized pressures to invest in retirement has elevated the importance of financial literacy in the 21st century. Late employment careers and patterns of financial literacy are studied in this article using the premier U.S. longitudinal dataset from the National Institute of Aging, the Health and Retirement Study initiated in 1992, which is linked to restricted Social Security earnings records that extend over several decades. These merged data afford the opportunity to observe continuous work histories in this sample from 1981 through 2006 to identify latent trajectories of employment in late life. In addition, a supplementary module attached to the 2004 wave of the HRS provides valuable information on the financial literacy of subgroups. The work-retirement trajectories and financial literacy patterns observed reflect persistent patterns of inequality amplified by modern risks in the labor market.
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Estimating the long-run relationship between income inequality and economic development
Tuomas Malinen
Empirical Economics, February 2012, Pages 209-233
Abstract:
There are several theories describing the effect of income inequality on economic growth. These theories usually predict that there exists some optimal, steady-state growth path between inequality and development. This study uses a new measure of income distribution and panel data cointegration methods to test for the existence of such a steady-state equilibrium relation. It is shown that there is a long-run equilibrium relationship between the variables, and that this relationship is negative in developed economies.
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Relative Deprivation: A Theoretical and Meta-Analytic Review
Heather Smith et al.
Personality and Social Psychology Review, forthcoming
Abstract:
Relative deprivation (RD) is the judgment that one is worse off compared to some standard accompanied by feelings of anger and resentment. Social scientists use RD to predict a wide range of significant outcome variables: collective action, individual achievement and deviance, intergroup attitudes, and physical and mental health. But the results are often weak and inconsistent. The authors draw on a theoretical and meta-analytic review (210 studies composing 293 independent samples, 421 tests, and 186,073 respondents) to present a model that integrates group and individual RD. RD measures that (a) include justice-related affect, (b) match the outcome level of analysis, and (c) use higher quality measures yield significantly stronger relationships. Future research should focus on appropriate RD measurement, angry resentment, and the inclusion of theoretically relevant situational appraisals. Such methodological improvements would revitalize RD as a useful social psychological predictor of a wide range of important individual and social processes.
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Long-term association of economic inequality and mortality in adult Costa Ricans
Sepideh Modrek, William Dow & Luis Rosero-Bixby
Social Science & Medicine, January 2012, Pages 158-166
Abstract:
Despite the large number of studies, mostly in developed economies, there is limited consensus on the health effects of inequality. Recently a related literature has examined the relationship between relative deprivation and health as a mechanism to explain the economic inequality and health relationship. This study evaluates the relationship between mortality and economic inequality, as measured by area-level Gini coefficients, as well as the relationship between mortality and relative deprivation, in the context of a middle-income country, Costa Rica. We followed a nationally representative prospective cohort of approximately 16,000 individuals aged 30 and over who were randomly selected from the 1984 census. These individuals were then linked to the Costa Rican National Death Registry until Dec. 31, 2007. Hazard models were used to estimate the relative risk of mortality for all-cause and cardiovascular disease mortality for two indicators: canton-level income inequality and relative deprivation based on asset ownership. Results indicate that there was an unexpectedly negative association between canton income inequality and mortality, but the relationship is not robust to the inclusion of canton fixed-effects. In contrast, we find a positive association between relative deprivation and mortality, which is robust to the inclusion of canton fixed-effects. Taken together, these results suggest that deprivation relative to those higher in a hierarchy is more detrimental to health than the overall dispersion of the hierarchy itself, within the Costa Rican context.
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Manoj Atolia, Santanu Chatterjee & Stephen Turnovsky
Journal of Economic Dynamics and Control, March 2012, Pages 331-348
Abstract:
This paper examines the significance of the time path of a given productivity increase on growth and inequality. Whereas the time path impacts only the transitional paths of aggregate quantities, it has both transitional and permanent consequences for wealth and income distribution. Hence, the growth-inequality tradeoff generated by a given discrete increase in productivity contrasts sharply with that obtained when the same productivity increase occurs gradually. The latter can generate a Kuznets-type relationship between inequality and per-capita income. Our results suggest that economies with similar aggregate structural characteristics may have different outcomes for income and wealth inequality, depending on the nature of the productivity growth path.
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The emergence of popular personal finance magazines and the risk shift in American society
Roei Davidson
Media, Culture & Society, January 2012, Pages 3-20
Abstract:
This study considers the emergence of personal finance magazines in the US after the Second World War. It examines an instance when a possible relationship existed between a media genre's emergence and shifts in the general political economy. It suggests that the appearance of the personal finance genre was related to the shift in the American political economy from corporate liberalism to neoliberalism. Specifically, it focuses on the hailing patterns evident in personal finance magazines' editorial statements, and finds that these patterns attempt to constitute a popular and heterogeneous investing public of independent individuals in which magazines supplant other agents as sources of advice.