Findings

Taking it to the streets

Kevin Lewis

February 08, 2019

Do Tax Cuts Produce More Einsteins? The Impacts of Financial Incentives vs. Exposure to Innovation on the Supply of Inventors
Alexander Bell et al.
NBER Working Paper, January 2019

Abstract:

Many countries provide financial incentives to spur innovation, ranging from tax incentives to research and development grants. In this paper, we study how such financial incentives affect individuals' decisions to pursue careers in innovation. We first present empirical evidence on inventors' career trajectories and income distributions using de-identified data on 1.2 million inventors from patent records linked to tax records in the U.S. We find that the private returns to innovation are extremely skewed – with the top 1% of inventors collecting more than 22% of total inventors' income – and are highly correlated with their social impact, as measured by citations. Inventors tend to have their most impactful innovations around age 40 and their incomes rise rapidly just before they have high-impact patents. We then build a stylized model of inventor career choice that matches these facts as well as recent evidence that childhood exposure to innovation plays a critical role in determining whether individuals become inventors. The model predicts that financial incentives, such as top income tax reductions, have limited potential to increase aggregate innovation because they only affect individuals who are exposed to innovation and have no impact on the decisions of star inventors, who matter most for aggregate innovation. Importantly, these results hold regardless of whether the private returns to innovation are known at the time of career choice. In contrast, increasing exposure to innovation (e.g., through mentorship programs) could have substantial impacts on innovation by drawing individuals who produce high-impact inventions into the innovation pipeline. Although we do not present direct evidence supporting these model-based predictions, our results call for a more careful assessment of the impacts of financial incentives and a greater focus on alternative policies to increase the supply of inventors.


Inequality and Market Concentration, When Shareholding is More Skewed than Consumption
Joshua Gans et al.
NBER Working Paper, December 2018

Abstract:

Economic theory suggests that monopoly prices hurt consumers but benefit shareholders. But in a world where individuals or households can be both consumers and shareholders, the impact of market power on inequality depends in part on the relative distribution of consumption and corporate equity ownership across individuals or households. The paper calculates this distribution for the United States, using data from the Survey of Consumer Finances and the Consumer Expenditure Survey, spanning nearly three decades from 1989 to 2016. In 2016, the top 20 percent consumed approximately as much as the bottom 60 percent, but had 13 times as much corporate equity. Because ownership is more skewed than consumption, increased mark-ups increase inequality. Moreover, over time, corporate equity has become even more skewed relative to consumption.


What Do Donors Want? Heterogeneity by Party and Policy Domain
David Broockman & Neil Malhotra
Stanford Working Paper, November 2018

Abstract:

Influential theories indicate concern that campaign donors exert outsized political influence. However, little data documents what donors actually want from government; and existing research largely neglects donors' views on individual issues. We argue there should be significant heterogeneity by party and policy domain in how donors' views diverge from citizens. We support this argument with the largest survey of U.S. partisan donors to date, including an oversample of the largest donors. We find that Republican donors are much more conservative than Republican citizens on economic issues, whereas their views are similar on social issues. By contrast, Democratic donors are much more liberal than Democratic citizens on social issues, whereas their views are more similar on economic issues. Both parties' donors are more pro-globalism than their citizen counterparts. We replicate these patterns in an independent dataset. These patterns can help inform significant debates about representation, inequality, and populism in American politics.


Economic Segregation and Unequal Policy Responsiveness
Patrick Flavin & William Franko
Political Behavior, forthcoming

Abstract:

As levels of residential economic segregation increase in the United States, politicians may have greater incentives to focus their attention on the demands of those living in wealthier communities at the expense of those living in less affluent areas. To better understand the link between economic context and political representation, we develop a measure of economic segregation at the local level and combine public policy preferences and multiple roll call votes in the House of Representatives over several sessions to measure policy responsiveness. Our empirical analysis presents evidence that, regardless of one’s individual level of income, citizens who live in an area of concentrated affluence are better represented by their Member of Congress. Conversely, citizens who live in an area of concentrated poverty are poorly represented. Importantly, we also show that the disproportionate focus affluent areas receive from congressional campaigns and the disproportionate campaign contributions that flow from those areas are two possible mechanisms that explain the relationship between economic context and political representation. These findings suggest that growing residential economic segregation in the United States has important implications for our understanding of political equality and the responsiveness of elected officials to public opinion.


Income-Related Gaps in Early Child Cognitive Development: Why Are They Larger in the United States Than in the United Kingdom, Australia, and Canada?
Bruce Bradbury, Jane Waldfogel & Elizabeth Washbrook
Demography, February 2019, Pages 367–390

Abstract:

Previous research has documented significantly larger income-related gaps in children’s early cognitive development in the United States than in the United Kingdom, Canada, and Australia. In this study, we investigate the extent to which this is a result of a more unequal income distribution in the United States. We show that although incomes are more unequal in the United States than elsewhere, a given difference in real income is associated with larger gaps in child test scores there than in the three other countries. In particular, high-income families in the United States appear to translate the same amount of financial resources into greater cognitive advantages relative to the middle-income group than those in the other countries studied. We compare inequalities in other kinds of family characteristics and show that higher income levels are disproportionately concentrated among families with advantageous demographic characteristics in the United States. Our results underline the fact that the same degree of income inequality can translate into different disparities in child development, depending on the distribution of other family resources.


Who Feels It? Income Inequality, Relative Deprivation, and Financial Satisfaction in U.S. States, 1973–2012
Orestes Hastings
Research in Social Stratification and Mobility, April 2019, Pages 1-15

Abstract:

Many accounts posit that as income inequality rises, individuals will be less satisfied with their own financial situation as they feel increasingly deprived relative to others — driving these individuals to spend more as they engage in positional competition and increasing their anxieties as position in the income distribution becomes ever more important. I examine if and for whom income inequality reduces financial satisfaction by analyzing the 1973–2012 General Social Surveys linked to state-level administrative data based on tax returns, the Census, and the American Community Survey. I find that higher state-level income inequality decreases financial satisfaction overall, and I further find that this effect is especially pronounced for those in the middle of the income distribution. Counterfactual simulations suggest rising income inequality explains a substantial portion of a four-decade decline in financial satisfaction.


Does a rising tide lift all boats? Liberalization and real incomes in advanced industrial societies
Roy Kwon & Brianna Salcido
Social Science Research, forthcoming

Abstract:

Many scholars argue that liberalization increases both economic growth and income inequality in developed economies. However, there is limited research on how liberal economic policies shape the earnings of different income groups in the national economy. The current study thus attempts to fill this gap in the literature by examining a panel dataset of 15 advanced industrial societies during the years 1970–2010. According to the results, long-run measures of liberalization increase the incomes of the top 0.1%, but does not return significant results for the incomes of the top 1.0% and top 10%. Furthermore, no discernible effect of liberalization is observed for the incomes of the bottom 90%. When taken together, although most researchers focus on inter-group inequality by examining how liberalization augments the incomes of top earners vis-à-vis bottom earners, the evidence of this study indicates scholars should also focus on intra-group inequality among top earners, as liberalization seems to benefit only a very small segment of elite earners in the national economy.


Capitalists in the Twenty-First Century
Matthew Smith et al.
NBER Working Paper, January 2019

Abstract:

Have the idle rich replaced the working rich at the top of the U.S. income distribution? Using tax data linking 11 million firms to their owners, this paper finds that entrepreneurs who actively manage their firms are key for top income inequality. Most top income is non-wage income, a primary source of which is private business profit. These profits accrue to working-age owners of closely-held, mid-market firms in skill-intensive industries. Private business profit falls by three-quarters after owner retirement or premature death. Classifying three-quarters of private business profit as human capital income, we find that most top earners are working rich: they derive most of their income from human capital, not physical or financial capital. The human capital income of private business owners exceeds top wage income and top public equity income. Growth in private business profit is explained by both rising productivity and a rising share of value added accruing to owners.


Wealth and inequality over eight centuries of British capitalism
Jakob Madsen
Journal of Development Economics, May 2019, Pages 246-260

Abstract:

This paper constructs annual data for the wealth-income ratio, W-Y, for the UK over the period 1210–2013. It is found that the W-Y ratio has fluctuated at one-two century frequencies about a constant level of approximately 500% over the past eight centuries. Furthermore, a U-shaped W-Y path is identified over the past two centuries and it is argued that the descending part of the U-shape is driven by the transition from pre-industrial modes of production to industrialization and that the post-1980 upturn in the W-Y ratio represents the transition from the industrial to the post-industrialization era.


The Deprivation-Protest Paradox: How the Perception of Unfair Economic Inequality Leads to Civic Unrest
Séamus Power
Current Anthropology, December 2018, Pages 765-789

Abstract:

The global economy collapsed in 2007–2008. The Irish initially accepted harsh austerity when the economy tanked. Yet, when Ireland had the fastest-growing economy in Europe in 2014 and 2015, mass demonstrations, standoffs and clashes with police, and other forms of civil unrest occurred. In this article, I introduce the “Deprivation-Protest Paradox.” Drawing on in-depth urban ethnographic work in a small Irish city and randomly sampled interviews at a series of seven national demonstrations in Dublin, Ireland, I illustrate the ways in which people were aware of a narrative of objective economic recovery in the Republic of Ireland but were not feeling it subjectively in their lived experiences. And this gap — between expectations and lived experiences — galvanized and legitimized protest and civic discontent. I discuss the implications of this paradox for developing a new theory of unfair economic inequality, democratic engagement, and social change.


The Goldilocks effect: Convergence in national income distributions, 1990–2015
Rob Clark
Social Science Research, forthcoming

Abstract:

Recent work shows that national income distributions are converging, with stratified nations becoming more equal and egalitarian countries becoming more unequal. I replicate this finding using more recent data from multiple sources, drawing from 3006 observations across 152 countries from the Standardized World Income Inequality Database (SWIID) and 238 observations across 46 countries from the Luxembourg Income Study (LIS) during the 1990–2015 period. I find that a country's initial Gini is negatively related to subsequent change in the Gini (i.e., β-convergence), with egalitarian and stratified countries both drifting towards a more moderate level of inequality. I then test several theoretical explanations for this trend, including (1) sectoral transitions, (2) economic development, (3) global diffusion, (4) public sentiment, and (5) statistical bias. Overall, the results are most consistent with the latter two accounts, indicating a public aversion to, and statistical bias against, extreme levels of (in)equality. By contrast, β-convergence is not explained by sectoral transitions, nor do development or globalization appear to accelerate the process, casting doubt on alternative interpretations. Overall, the findings suggest that scholars should begin to account for convergence dynamics when modeling income distributions within nations.


Human children but not chimpanzees make irrational decisions driven by social comparison
Esther Herrmann et al.
Proceedings of the Royal Society: Biological Sciences, 2 January 2019

Abstract:

Human evolutionary success is often argued to be rooted in specialized social skills and motivations that result in more prosocial, rational and cooperative decisions. One manifestation of human ultra-sociality is the tendency to engage in social comparison. While social comparison studies typically focus on cooperative behaviour and emphasize concern for fairness and equality, here we investigate the competitive dimension of social comparison: a preference for getting more than others, expressed in a willingness to maximize relative payoff at the cost of absolute payoff. Chimpanzees and human children (5–6- and 9–10-year-olds) could decide between an option that maximized their absolute payoff (but put their partner at an advantage) and an option that maximized their relative payoff (but decreased their own and their partner's payoff). Results show that, in contrast to chimpanzees and young children, who consistently selected the rational and payoff-maximizing option, older children paid a cost to reduce their partner's payoff to a level below their own. This finding demonstrates that uniquely human social skills and motivations do not necessarily lead to more prosocial, rational and cooperative decision-making.


Determinants of the opinion gap between the elites and the public in the United States
Hong Min Park & George Hawley
Social Science Journal, forthcoming

Abstract:

Recent scholarship indicates that elites possess disproportionate power in the policy-making process in the United States. The degree to which elite preferences trump the preferences of non-elite Americans raises questions about American democracy, and even indicates the nation exhibits oligarchic tendencies. This paper seeks to further our understanding of when or how elite preferences differ from those of the general public. We utilize the unique survey data that ask identical questions both to the elites and to the general public, and present a quantitative model in which the opinion gap between elites and non-elites is the dependent variable. Our results indicate that elites are particularly likely to diverge from the rest of the population on issues related to economic and domestic policy. The preference gap is typically smaller on issues related to international affairs.


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