General Relativity
Sources of Lifetime Inequality
Mark Huggett, Gustavo Ventura & Amir Yaron
American Economic Review, forthcoming
Abstract:
Is lifetime inequality mainly due to differences across people established early in life or to differences in luck experienced over the working lifetime? We answer this question within a model that features idiosyncratic shocks to human capital, estimated directly from data, as well as heterogeneity in ability to learn, initial human capital, and initial wealth. We find that, as of age 23, differences in initial conditions account for more of the variation in lifetime earnings, lifetime wealth and lifetime utility than do differences in shocks received over the working lifetime.
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Marriage Meets the Joneses: Relative Income, Identity, and Marital Status
Tara Watson & Sara McLanahan
Journal of Human Resources, Summer 2011, Pages 482-517
Abstract:
This paper investigates the effect of relative income on marriage. Accounting flexibly for absolute income, the ratio between a man's income and a local reference group median is a strong predictor of marital status, but only for low-income men. Relative income affects marriage even among those living with a partner. A 10 percent higher reference group income is associated with a 2 percent reduction in marriage. We propose an identity model to explain the results.
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The long run effects of changes in tax progressivity
Daniel Carroll & Eric Young
Journal of Economic Dynamics and Control, forthcoming
Abstract:
This paper compares the steady state outcomes of revenue-neutral changes to the progressivity of the tax schedule. Our economy features heterogeneous households who differ in their preferences and permanent labor productivities, but it does not have idiosyncratic risk. We find that increases in the progressivity of the tax schedule are associated with long-run distributions with greater aggregate income, wealth, and labor input. Average hours generally declines as the tax schedule becomes more progressive implying that the economy substitutes away from less productive workers toward more productive workers. Finally, as progressivity increases, income inequality is reduced and wealth inequality rises. Many of these results are qualitatively different than those found in models with idiosyncratic risk, and therefore suggest closer attention should be paid to modeling the insurance opportunities of households.
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How Network Externalities Can Exacerbate Intergroup Inequality
Paul DiMaggio & Filiz Garip
American Journal of Sociology, May 2011, Pages 1887-1933
Abstract:
The authors describe a common but largely unrecognized mechanism that produces and exacerbates intergroup inequality: the diffusion of valuable practices with positive network externalities through social networks whose members differentially possess characteristics associated with adoption. The authors examine two cases: the first, to explore the mechanism's implications and, the second, to demonstrate its utility in analyzing empirical data. In the first, the diffusion of Internet use, network effects increase adoption's benefits to associates of prior adopters. An agent-based model demonstrates positive, monotonic relationships, given externalities, between homophily bias and intergroup inequality in equilibrium adoption rates. In the second, rural-urban migration in Thailand, network effects reduce risk to persons whose networks include prior migrants. Analysis of longitudinal individual-level migration data indicates that network homophily interacts with network externalities to induce divergence of migration rates among otherwise similar villages.
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Intergenerational Occupational Mobility in Britain and the U.S. Since 1850
Jason Long & Joseph Ferrie
American Economic Review, forthcoming
Abstract:
The U.S. tolerates more inequality than Europe and believes its economic mobility is greater than Europe's, though they had roughly equal rates of intergenerational occupational mobility in the late twentieth century. We extend this comparison into the nineteenth century using 23,000 nationally-representative British and U.S. fathers and sons. The U.S. was more mobile than Britain through 1900, so in the experience of those who created the U.S. welfare state in the 1930s, the U.S. had indeed been "exceptional." The U.S. mobility lead over Britain was erased by the 1950s, as U.S. mobility fell from its nineteenth century levels.
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"Last-place Aversion": Evidence and Redistributive Implications
Ilyana Kuziemko et al.
Princeton Working Paper, May 2011
Abstract:
Scholars from a variety of disciplines have long studied why low-income groups are often in conflict, when their circumstances would seem to suggest they would unite to demand greater redistribution. We explore whether such divisions might arise in part from an aversion to being in "last place," which leads lower-income individuals to punish those slightly below or above themselves, with the hope of having someone to "look down on." We define a simple utility function that reflects "last-place aversion," and develop laboratory experiments to test its predictions for both risk-aversion and preferences over redistribution. We show that participants choose gambles with the potential to move them out of last place that they reject when randomly placed in other parts of the distribution. Similarly, in money-transfer games, those randomly placed in second-to-last place are the least likely to costlessly give money to the player one rank below them. Last-place aversion also predicts that those just above the minimum wage might actually oppose minimum-wage increases as they would no longer have a lower-wage group beneath them, and we confirm this prediction using survey data.
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Philippe Belley, Marc Frenette & Lance Lochner
NBER Working Paper, July 2011
Abstract:
This paper examines the implications of tuition and need-based financial aid policies for family income - post-secondary (PS) attendance relationships. We first conduct a parallel empirical analysis of the effects of parental income on PS attendance for recent high school cohorts in both the U.S. and Canada using data from the 1997 Cohort of the National Longitudinal Survey of Youth and Youth in Transition Survey. We estimate substantially smaller PS attendance gaps by parental income in Canada relative to the U.S., even after controlling for family background, adolescent cognitive achievement, and local residence fixed effects. We next document that U.S. public tuition and financial aid policies are actually more generous to low-income youth than are Canadian policies. By contrast, Canada offers more generous aid to middle-class youth than does the U.S. These findings suggest that the much stronger family income - PS attendance relationship in the U.S. is not driven by differences in the need-based nature of financial aid policies. Based on previous estimates of the effects of tuition and aid on PS attendance, we consider how much stronger income - attendance relationships would be in the absence of need-based aid and how much additional aid would need to be offered to lower income families to eliminate existing income - attendance gaps entirely.
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Children's Responses to Group-Based Inequalities: Perpetuation and Rectification
Kristina Olson et al.
Social Cognition, June 2011, Pages 270-287
Abstract:
The current studies investigate whether, and under what conditions, children engage in system-perpetuating and system-attenuating behaviors when allocating resources to different social groups. In three studies, we presented young children with evidence of social group inequalities and assessed whether they chose to perpetuate or rectify these inequalities. Children (aged 3.5-11.5 years) heard about two social groups (i.e., racial or novel groups) whose members received resources unequally (two cookies versus one). Participants were then given the opportunity to distribute additional resources to new members of the same groups. In Experiment 1, when children were presented with inequalities involving groups of Blacks and Whites, older children (aged 7.5-11.5 years) rejected the status quo, providing more resources to members of groups with fewer resources (White or Black), whereas younger children (aged 3.5-7.5 years) perpetuated the status quo. In Experiments 2 and 3, the inequalities involved Asians and Whites and novel groups. Children of all ages perpetuated inequality, with rectification strategies applied only by older children and only when Black targets were involved in the inequality. Equal sharing occasionally occurred in older children but was never a common response. These findings provide evidence that system-perpetuating tendencies may be predominant in children and suggest that socialization may be necessary to counter them.
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Agency and the construction of social preference: Between inequality aversion and prosocial behavior
Shoham Choshen-Hillel & Ilan Yaniv
Journal of Personality and Social Psychology, forthcoming
Abstract:
The term social preference refers to decision makers' satisfaction with their own outcomes and those attained by comparable others. The present research was inspired by what appears to be a discrepancy in the literature on social preferences-specifically, between a class of studies demonstrating people's concern with inequality and others documenting their motivation to increase social welfare. The authors propose a theoretical framework to account for this puzzling difference. In particular, they argue that a characteristic of the decision setting-an individual's role in creating the outcomes, referred to as agency-critically affects decision makers' weighting of opposing social motives. Namely, in settings in which people can merely judge the outcomes, but cannot affect them ("low agency"), their concern with inequality figures prominently. In contrast, in settings in which people determine the outcomes for themselves and others ("high agency"), their concern with the welfare of others is prominent. Three studies using a new salary-allocation paradigm document a robust effect of agency. In the high-agency condition, participants had to assign salaries, whereas in the low-agency condition, they indicated their satisfaction with equivalent predetermined salaries. It was found that, compared with low-agency participants, high-agency participants were less concerned with disadvantageous salary allocations and were even willing to sacrifice a portion of their pay to better others' outcomes. The effects of agency are discussed in connection to inequality aversion, social comparison, prosocial behavior, and preference construction.
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Social Insurance and Income Redistribution in a Laboratory Experiment
Justin Esarey, Timothy Salmon & Charles Barrilleaux
Political Research Quarterly, forthcoming
Abstract:
Why do some voters support income redistribution while others do not? Public assistance programs have two entangled effects on society: they equalize wealth, but they also cushion people against random catastrophes (like natural disasters). The authors conduct a laboratory experiment to determine how individuals' responses to the environment are related to their self-expressed political ideology and their self-interest. The findings support the hypothesis that ideology is associated with a person's willingness to use redistribution to reduce income inequality that is caused by luck, but it is not related to preferences for inequality that are not related to luck.
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Distributional Preferences and Competitive Behavior
Loukas Balafoutas, Rudolf Kerschbamer & Matthias Sutter
Journal of Economic Behavior & Organization, forthcoming
Abstract:
We study experimentally the relationship between distributional preferences and competitive behavior. We find that spiteful subjects react strongest to competitive pressure and win in a tournament significantly more often than efficiency-minded and inequality averse subjects. However, when given the choice between a tournament and a piece rate scheme, efficiency-minded subjects choose the tournament most often, while spiteful and inequality averse subjects avoid it. When controlling for distributional preferences, risk attitudes and past performance, the gender gap in the willingness to compete is no longer significant, indicating that gender-related variables explain why twice as many men as women self-select into competition.
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Inequality convergence in a panel of states
Pei-Chien Lin & Ho-Chuan (River) Huang
Journal of Economic Inequality, June 2011, Pages 195-206
Abstract:
This paper empirically tests for convergence in income inequality using a large panel of annual data for 48 states in the U.S. during the 1916-2005 period. By implementing the novel OLS estimator introduced by Bao and Dhongde (Oxf Bull Econ Stat 71:295-302, 2009), we find overwhelming evidence in support of convergence in income distribution. The results are robust to the uses of alternative inequality indicators, regions, and time periods.
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The Myth of Post-Reform Income Stagnation: Evidence from Brazil and Mexico
Irineu de Carvalho Filho & Marcos Chamon
Journal of Development Economics, forthcoming
Abstract:
Economic policies are often judged by a handful of statistics, some of which may be biased during periods of change. We estimate the income growth implied by the evolution of food demand and durable good ownership in post-reform Brazil and Mexico, and find that changes in consumption patterns are inconsistent with official estimates of near stagnant incomes. That is attributed to biases in the price deflator. The estimated unmeasured income gains are higher for poorer households, implying marked reductions in "real" inequality. These findings challenge the conventional wisdom that post-reform income growth was low and did not benefit the poor.
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Democracy and Growth in Divided Societies: A Health-Inequality Trap?
Timothy Powell-Jackson et al.
Social Science & Medicine, July 2011, Pages 33-41
Abstract:
Despite a tremendous increase in financial resources, many countries are not on track to achieve the child and maternal mortality targets set out in the Millennium Development Goals 4 and 5. Two main social factors -- improved democratic governance and aggregate income - are argued ultimately lead to progress in reducing child and maternal mortality, while others suggest these alone are insufficient in the context of high levels of social stratification, pointing to a need for targeted pro-poor interventions. To test the effects of growth and democratization, and their interaction with social inequalities, we regressed data on child and maternal mortality rates for 192 countries against internationally used indexes of income, democracy, and population inequality (including income, ethnic, linguistic, and religious divisions) covering the period 1970-2007. We found that higher degree of social division, especially ethnic and linguistic fractionalisation, was significantly associated with greater child and maternal mortality rates. Our path analysis found that, even in democratic states, greater social division reduced overall population access to healthcare and health system infrastructure. Perversely, while greater democratization and aggregate income were associated with reduced maternal and child mortality overall, in regions with high levels of ethnic fragmentation the health benefits of democratization and rising income were undermined and, at high levels of inequality reversed, so that democracy and growth were adversely related to child and maternal mortality. These findings are consistent with literature that high degrees of social division in the context of democratisation can strengthen the power of dominant elite and ethnic groups in political decision-making, resulting in health policies that deprive minority groups (a health-inequality trap). Thus, we show that improving economic growth and democratic governance are insufficient to achieve child and maternal health targets in communities with high levels of persistent social inequality. To reduce child and maternal mortality in highly divided societies, it will be necessary not only to increase growth and promote democratic elections, but also empower disenfranchised communities.
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Nadia Ansary, Thomas McMahon & Suniya Luthar
Journal of Research on Adolescence, forthcoming
Abstract:
Temporal associations in the relationship between emotional-behavioral difficulty and academic achievement were explored in 2 samples followed from 6th through 8th grade. The first sample comprised 280 students entering an economically disadvantaged urban middle school and the second comprised 318 students entering an affluent suburban middle school. Among disadvantaged youth, emotional indices were concurrently associated with poorer achievement while prospective associations between substance use and achievement were evident. For privileged adolescents, only a significant concurrent relationship emerged between social anxiety and achievement, although nonsignificant trends in the data suggest other, albeit weak, associations. The findings are discussed in terms of similarities and differences in these temporal associations across 2 samples representing extremes of the socioeconomic continuum.