IV) Income Inequality and the
Easterlin paradox
• One of the missing variables?
 (in the estimation of the relationship
between Income and Happiness)
 Di Tella and MacCulloch (2008).
 Sacks, Stevenson and Wolfers (2010)
1
Stevenson and Wolfers (2008)
2
III. The aversion to inequality and
the demand for income
redistribution
Two notions of inequality :
- the distribution of national income in
general
- the income gap between my reference
group and myself
In both cases: the link between inequality
and well-being can be direct or
informational.
3
Beliefs and preferences
• Beliefs on the factors of social
success, on the process of income
generation
• Preferences for these elements – for
the process
• Preferences for the outcomes
4
Fairness preferences
• Distributive justice : judged by final
outcomes
 Needs principles
 Equity principle (individual
inputs/outputs)
o Exogenous inputs: luck, birth
o Endogenous inputs: effort, choice
• Procedural fairness
 Voice for everybody
 Neutrality of decision-makers
 Transparent and consistent procedures
5
Beliefs
• Beliefs about the cause of income
inequality
• About the return to effort
Self-interest and self-serving biases
Personal characteristics and the
sensitivity to inequality
 Women
 Age
 Education
 Country’s history
 Religiosity
…
6
Alesina, Glaeser and Sacerdote (2001)
7
Attitudes towards income
inequality
•
Alesina A., di Tella R. and MacCulloch
R. (2004), Journal of Public Economics, 88
(9-10), 2009-2042.
• Alesina A., and la Ferrara E. (2001),
Journal of Public Economics, May 2005,
89: 897-931
• Alesina A., Glaeser E. and Sacerdote B.
(2001), Brookings Papers on Economic
Activity, Fall, 187-278.
• Corneo G. and H-P. Grüner (2000),
American Economic Review, 90, 1491-1507.
• Fong C. (2001), Journal of Public
Economics, 82, 225-246.
Difference Europe-USA
8
1. A pure preference for income
equality?
National / cultural differences?
9
Morawetz D.
“Income Distribution and SelfRated Happiness: Some Empirical
Evidence”
The Economic Journal
1977, 87, 511-522
11
Alesina, di Tella and Mac Culloch
“Inequality and Happiness: are
Europeans and Americans
Different? »
Journal of Public Economics, 2004.
• Data :
- US General Social Survey, 1972-1994,
24 333 individuals, 23 years.
- Europe : Euro-barometer, 1975-1992,
273 386 individuals, 18 years.
- Self-rated happiness.
- Gini Coefficients (Deiniger et Squire,
1996).
12
13
14
15
16
17
18
19
20
2. Beliefs and aversion to
inequality
POUM, Fairness, reciprocity,
responsibility, etc.
21
Beliefs * Self-Interest
• Benabou R. and Ok E. (2001),
“Social Mobility and the Demand for
Redistribution: The POUM
Hypothesis”, Quarterly Journal of
Economics, 116 (2), 447-487.
22
Beliefs about factors of success
in life
Alesina,
Glaeser
and
Sacerdote
(2001)
« Why Doesn’t the US Have a
European-Style Welfare System ? »,
Brookings
Papers
on
Economic
Activity, Fall, 187-278.
23
24
Alesina and Angeletos,
“Fairness and Redistribution: US
versus Europe”,
American Economic Review, 2005, 95:
913-35.
25
26
27
Alesina and la Ferrara (2005),
“Preferences for Redistribution in
the Land of Opportunities”
Journal of Public Economics, 89:
897-931.
28
29
30
31
Beliefs * Preferences
Christina Fong,
« Social Preferences, Self-Interest,
and the Demand for Redistribution »
Journal of Public Economics
2001, 82, 225-246
Fong, Bowles and Gintis, “The
Behavioural Motives for Income
Redistribution”. Australian Economic
Review. 2005, 38(3), pp. 285-197.
32
Contributive justice
33
Contributive justice
34
Pure contributive justice
35
Ethnic altruism
Preferences (* Beliefs?)
Alesina, Glaeser and Sacerdote
« Why Doesn’t the US Have a
European-Style Welfare
System ? »
Brookings Papers on Economic
Activity, 2001, Fall, 187-278.
36
37
38
39
40
Erzo Luttmer
« Group Loyalty and the
Taste for Redistribution »
Journal of Political Economy
2001, 109(3)
41
Racial Heterogeneity inside the US and AFDC
State Transfers
42
Changing preferences for
income equality
• Alberto Alesina and Nicola FuchsSchündeln, « Good bye Lenin (or not?): The
Effect of Communism on People's
Preferences », American Economic Review,
2007, 97: 1507-1528.
• Feedback process of the economic regime on
individual preferences
• exploit the "experiment" of German separation
and reunification to establish exogeneity of the
economic system
• East Germans are more in favor of
redistribution and state intervention than West
Germans, even after controlling for economic
incentives.
 This effect is especially strong for older cohorts, who
lived under Communism for a longer time period.
• East Germans' preferences converge towards
those of West Germans.
• It will take one to two generations for
43
preferences to converge completely.
Alesina and Fuchs-Schuelden (2005)
44
Alesina and Fuchs-Schuelden (2005)
45
Alesina and Fuchs-Schuelden (2005)
46
47
Conclusion on welfare and
income inequality
• Pure aversion to inequality
• Preferences over the process of income
formation
• Contributive justice (insurance,
solidarity)
• Altruism?
• Interaction between beliefs and
preferences
• Might influence relationship between
GDP and Happiness.
48