Win, lose, or draw
Equalization or Selection? Reassessing the “Meritocratic Power” of a College Degree in Intergenerational Income Mobility
American Sociological Review, June 2019, Pages 459-485
Intergenerational mobility is higher among college graduates than among people with lower levels of education. In light of this finding, researchers have characterized a college degree as a great equalizer leveling the playing field, and proposed that expanding higher education would promote mobility. This line of reasoning rests on the implicit assumption that the relatively high mobility observed among college graduates reflects a causal effect of college completion on intergenerational mobility, an assumption that has rarely been rigorously evaluated. This article bridges this gap. Using a novel reweighting technique, I estimate the degree of intergenerational income mobility among college graduates purged of selection processes that may drive up observed mobility in this subpopulation. Analyzing data from the National Longitudinal Survey of Youth 1979, I find that once selection processes are adjusted for, intergenerational income mobility among college graduates is very close to that among non-graduates. This finding suggests that expanding the pool of college graduates per se is unlikely to boost intergenerational income mobility in the United States. To promote mobility, public investments in higher education (e.g., federal and state student aid programs) should be targeted at low-income youth.
The social advantage of miscalibrated individuals: The relationship between social class and overconfidence and its implications for class-based inequality
Peter Belmi et al.
Journal of Personality and Social Psychology, forthcoming
Understanding how socioeconomic inequalities perpetuate is a central concern among social and organizational psychologists. Drawing on a collection of findings suggesting that different social class contexts have powerful effects on people’s sense of self, we propose that social class shapes the beliefs that people hold about their abilities, and that this, in turn, has important implications for how status hierarchies perpetuate. We first hypothesize that compared with individuals with relatively low social class, individuals with relatively high social class are more overconfident. Then, drawing on research suggesting that overconfidence can confer social advantages, we further hypothesize that the overconfidence of higher class individuals can help perpetuate the existing class hierarchy: It can provide them a path to social advantage by making them appear more competent in the eyes of others. We test these ideas in four large studies with a combined sample of 152,661 individuals. Study 1, a large field study featuring small-business owners from Mexico, found evidence that individuals with relatively high social class are more overconfident compared with their lower-class counterparts. Study 2, a multiwave study in the United States, replicated this result and further shed light on the underlying mechanism: Individuals with relatively high (vs. low) social class tend to be more overconfident because they have a stronger desire to achieve high social rank. Study 3 replicated these findings in a high-powered, preregistered study and found that individuals with relatively high social class were more overconfident, even in a task in which they had no performance advantages. Study 4, a multiphase study that featured a mock job interview in the laboratory, found that compared with their lower-class counterparts, higher-class individuals were more overconfident; overconfidence, in turn, made them appear more competent and more likely to attain social rank.
The McMansion Effect: Top Size Inequality, House Satisfaction and Home Improvement in U.S. Suburbs
INSEAD Working Paper, April 2019
Despite a major upscaling of single-family houses since 1980, house satisfaction has remained steady in American suburbs. This Easterlin paradox in the realm of housing can be explained by upward-looking comparisons in the size of neighboring houses. Combining data from the American Housing Surveys with a geolocalised dataset of three million suburban houses, I find that new constructions at the top of the house size distribution lower the satisfaction that neighbors derive from their own house size. Upward-looking comparisons are stronger among people living in larger houses and decrease with the distance from McMansions. I provide further evidence that homeowners exposed to the construction of big houses in their neighborhood put lower prices on their home, are more likely to upscale to a bigger house and take up more debt.
Peers’ Income and Financial Distress: Evidence from Lottery Winners and Neighboring Bankruptcies
Sumit Agarwal, Vyacheslav Mikhed & Barry Scholnick
Review of Financial Studies, forthcoming
We examine whether relative income differences among peers can generate financial distress. Using lottery winnings as plausibly exogenous variations in the relative income of peers, we find that the dollar magnitude of a lottery win of one neighbor increases subsequent borrowing and bankruptcies among other neighbors. We also examine which factors may mitigate lenders’ bankruptcy risk in these neighborhoods. We show that bankruptcy filers obtain more secured, but not unsecured, debt, and lenders provide additional credit to low-risk, but not high-risk, debtors. In addition, we find evidence consistent with local lenders taking advantage of soft information to mitigate credit risk.
Automation and Top Income Inequality
Omer Faruk Koru
University of Pennsylvania Working Paper, March 2019
For almost 40 years, inequality within the top percentile of the income distribution, measured as the ratio of income share of top 0:1% to the income share of top 1%, has been increasing in the US. The income of super-rich people increased more than the income of rich people. In this paper, we show that improvements in automation technology (the number of tasks for which capital can be used) is an important factor contributing to this inequality. We consider a model in which labor has a convex cost and capital has a linear cost. This leads to a decreasing returns to scale profit function for entrepreneurs. As capital replaces labor in more and more tasks, the severity of diseconomies of scale diminishes, hence the market share of top-skilled entrepreneurs increases. If entrepreneurial skill is distributed according to a Pareto distribution, then top income distribution can be approximated by a Pareto distribution. We show that the shape parameter of this distribution is inversely related to the level of automation. Finally, we rationalize convex cost of labor using the theory of efficiency wage.
National income inequality predicts cultural variation in mouth to mouth kissing
Christopher Watkins et al.
Scientific Reports, April 2019
Romantic mouth-to-mouth kissing is culturally widespread, although not a human universal, and may play a functional role in assessing partner health and maintaining long-term pair bonds. Use and appreciation of kissing may therefore vary according to whether the environment places a premium on good health and partner investment. Here, we test for cultural variation (13 countries from six continents) in these behaviours/attitudes according to national health (historical pathogen prevalence) and both absolute (GDP) and relative wealth (GINI). Our data reveal that kissing is valued more in established relationships than it is valued during courtship. Also, consistent with the pair bonding hypothesis of the function of romantic kissing, relative poverty (income inequality) predicts frequency of kissing across romantic relationships. When aggregated, the predicted relationship between income inequality and kissing frequency (r = 0.67, BCa 95% CI[0.32,0.89]) was over five times the size of the null correlations between income inequality and frequency of hugging/cuddling and sex. As social complexity requires monitoring resource competition among large groups and predicts kissing prevalence in remote societies, this gesture may be important in the maintenance of long-term pair bonds in specific environments.
The Long-Run Effects of Neighborhood Change on Incumbent Families
Nathaniel Baum-Snow, Daniel Hartley & Kwan Ok Lee
Federal Reserve Working Paper, March 2019
A number of prominent studies examine the long-run effects of neighborhood attributes on children by leveraging variation in neighborhood exposure through household moves. How-ever, much neighborhood change comes in place rather than through moving. Using an urban economic geography model as a basis, this paper estimates the causal effects of changes in neighborhood attributes on long-run outcomes for incumbent children and households. For identification, we make use of quasi-random variation in 1990-2000 and 2000-2005 skill-specific labor demand shocks hitting each residential metro area census tract in the U.S. Our results indicate that children in suburban neighborhoods with a one standard deviation greater increase in the share of resident adults with a college degree experienced a 0.4 to 0.7 standard deviation improvement in credit outcomes 12-17 years later. Since parental outcomes are not affected, we interpret these results as operating through neighborhood effects. Finally, we provide evidence that most of the estimated effects operate through public schools.
Inequality and the Inflation Tax
Journal of Macroeconomics, forthcoming
Numerous studies document a positive correlation between inflation and income inequality. I show that this correlation has reversed, most notably in the European economies. More generally, the sign of the correlation depends on the time period and sample of countries. In the literature on the political economy of inflation, monetary financing and income taxes are substitutes. Correspondingly, as the correlation between inequality and inflation has become more negative, the correlation between inequality and income tax revenue has become more positive. Cross-country and panel regression analysis suggests that in democracies, independent central banks can resist political pressures for inflation that rise with inequality.
Robust Inequality of Opportunity Comparisons: Theory and Application to Early Childhood Policy Evaluation
Francesco Andreoli, Tarjei Havnes & Arnaud Lefranc
Review of Economics and Statistics, May 2019, Pages 355-369
This paper develops a criterion to assess equalization of opportunity that is consistent with theoretical views of equality of opportunity. We characterize inequality of opportunity as a situation where some groups in society enjoy an illegitimate advantage. In this context, equalization of opportunity requires that the extent of the illegitimate advantage enjoyed by the privileged groups falls. Robustness requires that this judgment be supported by the broadest class of individual preferences. We formalize this criterion in a decision-theoretic framework and derive an empirical condition for equalization of opportunity based on observed opportunity distributions. The criterion is used to assess the effectiveness of child care at equalizing opportunity among children, using quantile treatment effects estimates of a major child care reform in Norway. Overall, we find strong evidence supporting equalization of opportunity.
Shared Experience and Third-Party Redistribution
David Chavanne, Kevin McCabe & Maria Pia Paganelli
Eastern Economic Journal, June 2019, Pages 446–463
Using a three-player dictator-game experiment, we find that similar performance during a shared experience with a real-effort task causes a redistributor to privilege the stakeholder who performed similarly. We generate the shared experience by varying whether a third-party decision maker and a stakeholder acquire money through an effortful activity or through random selection of a ticket. Our results have implications for how perceptions of one’s own self-determination and social connectedness based on perceived similarities affect redistributive preferences.
The long-run relationship between finance and income inequality: Evidence from panel data
John Thornton & Caterina Di Tommaso
Finance Research Letters, forthcoming
We use heterogeneous panel cointegration techniques to examine the long-run effect of financial development on income inequality in a panel of 119 countries from 1980 to 2015. We include real GDP per capita in the cointegration relation and explicitly deal with cross-sectional dependence in the data that arises due to unobserved common factors. On average, financial development reduces income inequality in the long-run, with the result robust to different measures of finance and across country income groups.