1

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)

2

Stevenson and Wolfers (2008)

3

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.

4

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

5

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

6

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 inequalityWomenAgeEducationCountry’s historyReligiosity…

7

Alesina, Glaeser and Sacerdote (2001)

8

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

9

1. A pure preference for income equality?

National / cultural differences?

Morawetz D.

“Income Distribution and Self-

Rated Happiness: Some Empirical

Evidence”

The Economic Journal

1977, 87, 511-522

11

12

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).

13

14

15

16

17

18

19

20

21

2. Beliefs and aversion to inequality

POUM, Fairness, reciprocity,

responsibility, etc.

22

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.

23

Alesina, Glaeser and Sacerdote

(2001)

« Why Doesn’t the US Have a

European-Style Welfare System ? »,

Brookings Papers on Economic

Activity, Fall, 187-278.

Beliefs about factors of success in life

24

25

Alesina and Angeletos,

“Fairness and Redistribution: US

versus Europe”,

American Economic Review, 2005, 95:

913-35.

26

27

28

Alesina and la Ferrara (2005),

“Preferences for Redistribution in

the Land of Opportunities”

Journal of Public Economics, 89:

897-931.

29

30

31

32

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.

33

Contributive justice

34

Contributive justice

35

Pure contributive justice

36

Alesina, Glaeser and Sacerdote

« Why Doesn’t the US Have a

European-Style Welfare

System ? »

Brookings Papers on Economic

Activity, 2001, Fall, 187-278.

Ethnic altruism

Preferences (* Beliefs?)

37

38

39

40

41

Erzo Luttmer

« Group Loyalty and the

Taste for Redistribution »

Journal of Political Economy

2001, 109(3)

42

Racial Heterogeneity inside the US and AFDC State Transfers

43

Changing preferences for income equality

• Alberto Alesina and Nicola Fuchs-Schündeln, « 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 preferences to converge completely.

44

Alesina and Fuchs-Schuelden (2005)

45

Alesina and Fuchs-Schuelden (2005)

46

Alesina and Fuchs-Schuelden (2005)

47

48

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.