Winners and losers
Durable Democracy? Economic Inequality and Democratic Accountability in the New Gilded Age
Benjamin Newman & Thomas Hayes
Political Behavior, forthcoming
Abstract:
Scholarship in the U.S. provides mounting evidence of a linkage between economic inequality and inequality in representation and policymaking. In response, this article addresses a research question striking at the very heart of the resilience of the democratic capitalist design: Do voters punish elected officials for inequality? We advance the argument that voter punishment of incumbents for inequality will occur when inequality is locally salient and for officeholders that support inequality-enhancing legislation. Relying upon secondary analysis of large-N national survey data, we find that voters residing in high inequality contexts voted against incumbents who supported regressive tax policies and opposed minimum wage increases. Interestingly, for inequality-attenuating incumbents, we find increased support among voters in high inequality contexts. Importantly, robustness checks reveal that observed punishment effects hold for Democratic and Republican incumbents. We conclude by discussing the implications of our findings for American democracy in an era of rising inequality.
Marginal Tax Rates and Income: New Time Series Evidence
Karel Mertens & José Luis Montiel Olea
Quarterly Journal of Economics, forthcoming
Abstract:
Using new narrative measures of exogenous variation in marginal tax rates associated with postwar tax reforms in the US, this study estimates short-run tax elasticities of reported income of around 1.2 based on time series from 1946 to 2012. Estimated elasticities are larger in the top 1% of the income distribution but are also positive and statistically significant for other income groups. Previous time series studies of tax returns data have found little evidence for income responses to taxes outside the top of the income distribution. The different results in this paper arise because of additional efforts to account for dynamics, expectations, and especially the endogeneity of tax policy decisions. Marginal rate cuts lead to increases in real GDP and declines in unemployment. There is also evidence that the responses are to marginal tax rates rather than average tax rates. Counterfactual tax cuts targeting the top 1% alone are estimated to have short-run positive effects on economic activity and incomes outside of the top 1%, but to increase inequality in pre-tax incomes. Cuts for taxpayers outside of the top 1% also lead to increases in incomes and economic activity, but with a longer delay.
Barriers to prosperity: The harmful impact of entry regulations on income inequality
Dustin Chambers, Patrick McLaughlin & Laura Stanley
Public Choice, forthcoming
Abstract:
Entry regulations, including fees, permits and licenses, can make it prohibitively difficult for low-income individuals to establish footholds in many industries, even at the entry-level. As such, these regulations increase income inequality by either preventing access to higher paying professions or imposing costs on individuals choosing to enter illegally and provide unlicensed services. To estimate this relationship empirically, we combine entry regulations data from the World Bank’s Doing Business Index with various measures of income inequality, including Gini coefficients and income shares to form a panel of 115 countries. We find that countries with more stringent entry regulations tend to experience more income inequality. In countries with average inequality, increasing the number of procedures required to start a new business by one standard deviation is associated with a 7.2% increase in the share of income accruing to the top decile of earners, and a 12.9% increase in the overall Gini coefficient. This result is robust to the measure of inequality, startup regulations, and potential endogeneity. We conclude by offering several policy recommendations designed to minimize the adverse effects of entry regulations.
Inequality and redistribution behavior in a give-or-take game
Michael Bechtel, Roman Liesch & Kenneth Scheve
Proceedings of the National Academy of Sciences, forthcoming
Abstract:
Political polarization and extremism are widely thought to be driven by the surge in economic inequality in many countries around the world. Understanding why inequality persists depends on knowing the causal effect of inequality on individual behavior. We study how inequality affects redistribution behavior in a randomized “give-or-take” experiment that created equality, advantageous inequality, or disadvantageous inequality between two individuals before offering one of them the opportunity to either take from or give to the other. We estimate the causal effect of inequality in representative samples of German and American citizens (n = 4,966) and establish two main findings. First, individuals imperfectly equalize payoffs: On average, respondents transfer 12% of the available endowments to realize more equal wealth distributions. This means that respondents tolerate a considerable degree of inequality even in a setting in which there are no costs to redistribution. Second, redistribution behavior in response to disadvantageous and advantageous inequality is largely asymmetric: Individuals who take from those who are richer do not also tend to give to those who are poorer, and individuals who give to those who are poorer do not tend to take from those who are richer. These behavioral redistribution types correlate in meaningful ways with support for heavy taxes on the rich and the provision of welfare benefits for the poor. Consequently, it seems difficult to construct a majority coalition willing to back the type of government interventions needed to counter rising inequality.
Propagation of Economic Inequality Through Reciprocity and Reputation
Leor Hackel & Jamil Zaki
Psychological Science, forthcoming
Abstract:
Reciprocity and reputation are powerful tools for encouraging cooperation on a broad scale. Here, we highlight a potential side effect of these social phenomena: exacerbating economic inequality. In two novel economic games, we manipulated the amount of money with which participants were endowed and then gave them the opportunity to share resources with others. We found that people reciprocated more toward higher-wealth givers, compared with lower-wealth givers, even when those givers were equally generous. Wealthier givers also achieved better reputations than less wealthy ones and therefore received more investments in a social marketplace. These discrepancies were well described by a formal model of reinforcement learning: Individuals who weighted monetary outcomes, rather than generosity, when learning about interlocutors also most strongly helped wealthier individuals. This work demonstrates that reciprocity and reputation — although globally increasing prosociality — can widen wealth gaps and provides a precise account of how inequality grows through social processes.
Local Competition Amplifies the Corrosive Effects of Inequality
Daniel Krupp & Thomas Cook
Psychological Science, forthcoming
Abstract:
Inequality is widely believed to incite conflict, but the evidence is inconsistent. We argue that the spatial scale of competition — the extent to which individuals compete locally, with their interaction partners, or globally, with the entire population — can help settle the question. We built a mathematical model of the evolution of conflict under inequality and tested its predictions in an experimental game with 1,205 participants. We found that inequality increases conflict, destroys wealth, and engenders risk taking. Crucially, these effects are amplified by local competition. Thus, inequality is at its most damaging when it arises between close competitors. Indeed, at the extremes, the combined effects of inequality and the scale of competition are very large. More broadly, our findings suggest that disagreements in the literature may be the result of a mismatch between the scale at which inequality is measured and the scale at which conflict occurs.
Intangibles, Inequality and Stagnation
Nobuhiro Kiyotaki & Shengxing Zhang
Princeton Working Paper, January 2018
Abstract:
We examine how aggregate output and income distribution interact with accumulation of intangible capital over time and across individuals. We consider an overlapping generations economy in which managerial skill (intangible capital) is essential for production, and it is acquired by young workers through on-the-job training by old managers. We show that, when young trainees are not committed to staying in the same firms and repaying their debt, a small difference in initial endowment and ability of young workers leads to a large inequality in accumulation of intangibles and lifetime income. A negative shock to endowment or the degree of commitment generates a persistent stagnation and a rise in inequality.
The Effects of Household Medical Expenditures on Income Inequality in the United States
Andrea Christopher et al.
American Journal of Public Health, March 2018, Pages 351-354
Methods: We analyzed data from the US Current Population Surveys for calendar years 2010 through 2014. We calculated the Gini index of income inequality before and after subtracting households’ medical outlays (including insurance premiums and out-of-pocket costs) from income, the financial burden of medical outlays for each income decile, and the number of individuals pushed below poverty by medical outlays.
Results: In 2014, the Gini index was 47.84, which rose to 49.21 after medical outlays were subtracted, indicating that medical outlays effectively redistributed about 1.37% of total income from poorer to richer individuals, a slightly smaller redistribution compared with the years before the ACA. Medical outlays reduced the median income of the poorest decile by 47.6% versus 2.7% for the wealthiest decile and pushed 7.013 million individuals into poverty.
Conclusions: The way we finance medical care exacerbates income inequality and impoverishes millions of Americans. This regressive financing pattern improved minimally in the wake of the ACA.
(Mis)imagining the good life and the bad life: Envy and pity as a function of the focusing illusion
Ed O'Brien et al.
Journal of Experimental Social Psychology, March 2018, Pages 41-53
Abstract:
Envy is a negative state arising when we encounter others with more desirable circumstances than our own. Its converse is pity, a negative state elicited by downward comparisons towards worse-off others. Both classes of emotions first require us to infer what a person's life as a whole must be like. However, the “focusing illusion” suggests these impressions of others are incomplete: we may overweight extreme features (the exceptionally good circumstances of envied others and exceptionally bad circumstances of pitied others) at the cost of overlooking the smaller ups and downs of daily life, which inevitably dilute the other person's overall experience. If so, envy and pity could involve misperceiving that envied others have lives that are uniformly wonderful (overlooking that they still face smaller annoyances) and pitied others have lives that are uniformly awful (overlooking that they still enjoy smaller pleasures). Five studies support this possibility. First, participants evaluated different peers. Consistent with focalism, the more envy and pity they felt, the more disparities they perceived (Study 1) — yet the actual everyday lives of envied and pitied others were similar (Study 2). Participants then completed various defocusing tasks designed to bring to mind others' smaller ups and downs. This indeed reduced envy and pity (Studies 3–4a–4b–5), but pity proved harder to reduce (Studies 4b–5). These studies suggest the same underlying focalism may inflate feelings of envy and pity, with asymmetric regulation strategies: small annoyances spoil perceptions of a good life more than small pleasures enhance perceptions of a bad life.
Can Increased Educational Attainment Among Lower-Educated Mothers Reduce Inequalities in Children’s Skill Development?
Jennifer March Augustine & Daniela Negraia
Demography, forthcoming
Abstract:
A rich tradition of stratification research has established a robust link between mothers’ education and the skills in children that forecast children’s own mobility. Yet, this research has failed to consider that many U.S. women are now completing their education after having children. Such a trend raises questions about whether increases in mothers’ educational attainment can improve their children’s skill development and whether these gains are enough to reduce inequalities in skills compared with children whose mothers completed the same degree before they were born. To answer these questions, we draw on a nationally representative sample of mothers and children participating in the National Longitudinal Surveys (NLSY79 and CNLY), random- and fixed-effects techniques, and repeated measures of children’s cognitive and noncognitive skills. Contrary to existing research and theory, our results reveal that educational attainment obtained after children’s births is not associated with an improvement in children’s skills. Such findings offer substantial refinement to a long-standing model of intergenerational mobility by suggesting that the intergenerational returns to mother’s education are weaker when education is acquired after children are born. Results also highlight the limits of two-generation policy approaches to reducing inequality in future generations.
Social and Genetic Pathways in Multigenerational Transmission of Educational Attainment
Hexuan Liu
American Sociological Review, April 2018, Pages 278-304
Abstract:
This study investigates the complex roles of the social environment and genes in the multigenerational transmission of educational attainment. Drawing on genome-wide data and educational attainment measures from the Framingham Heart Study (FHS) and the Health and Retirement Study (HRS), I conduct polygenic score analyses to examine genetic confounding in the estimation of parents’ and grandparents’ influences on their children’s and grandchildren’s educational attainment. I also examine social genetic effects (i.e., genetic effects that operate through the social environment) in the transmission of educational attainment across three generations. Two-generation analyses produce three important findings. First, about one-fifth of the parent-child association in education reflects genetic inheritance. Second, up to half of the association between parents’ polygenic scores and children’s education is mediated by parents’ education. Third, about one-third of the association between children’s polygenic scores and their educational attainment is attributable to parents’ genotypes and education. Three-generation analyses suggest that genetic confounding on the estimate of the direct effect of grandparents’ education on grandchildren’s education (net of parents’ education) may be inconsequential, and I find no evidence that grandparents’ genotypes significantly influence grandchildren’s education through non-biological pathways. The three-generation results are suggestive, and the results may change when different samples are used.
Dynastic Inequality Compared: Multigenerational Mobility in the United States, the United Kingdom, and Germany
Guido Neidhöfer & Maximilian Stockhausen
Review of Income and Wealth, forthcoming
Abstract:
Using harmonized household survey data, we analyze long‐run social mobility in the United States, the United Kingdom, and Germany, and test recent theories of multigenerational persistence of socioeconomic status. In this country comparison setting, we find evidence against a universal law of social mobility. Our results show that the long‐run persistence of socioeconomic status and the validity of a first‐order Markov chain in the intergenerational transmission of human capital is country‐specific. Furthermore, we find that the direct and independent effect of grandparents' social status on grandchildren's status tends to vary by gender and institutional context.