Choosing inequality: how economic security fosters competitive regimes

This article has been updated

Abstract

In a novel experimental design, we study how social immobility affects the choice among distributional schemes in an experimental democracy. We design a two-period experiment in which subjects first choose a distributional scheme by majority voting (“social contract”). Then subjects engage in a competitive real-effort task to earn points. Based on production success, participants are ranked from best to worst. In combination with the initially chosen scheme, these ranks determine the final payout of the first round, leading to a pattern of societal stratification. Participants are informed individually about points and rank, before the same sequence of voting, production and payoff determination is repeated in a second round. To test the effect of social immobility on choosing distributional regimes the experiment is conducted with and without a social immobility factor, i.e. a different weighting of the two rounds. In our standard scenario, payoffs are simply added. In our “social immobility setting”, we alter the game as follows: the actual income in round 2 is calculated by adding 0.2 times the raw payoff from the second production game and 0.8 times the income from round 1. With the higher importance of round 1 success, we simulate the fact that economic movement upwards and downwards in societies (“social mobility”) is a de facto rigid constraint: high and low incomes tend to reproduce themselves. Our main findings are that in the Equal Weight Treatment, most groups opt for complete equality in both rounds, while in the unequal weight setting the initial choice of equality is followed by a shift to the most competitive regime. In both treatments, we observe that those performing well in round 1 tend to vote for unequal schemes in round 2, while low-performers develop an even stronger “taste for equality”. This supports a central Rawlsian idea: behind an (experimental) “veil of uncertainty”, the lack of idiosyncratic information is strong enough to let people decide as if driven by social preferences. The different group decisions in round 2 suggest that for this to happen, stakes need to be sufficiently high. To our surprise, other factors like gender, social background or real-life income have hardly any impact on unveiled decision making. We conclude that in our experimental democracy, competition based income allocation (a “market economy”) finds support only if people are sufficiently well off. Hence, increasing inequality perpetuated by social immobility is likely to undermine the general support for market-based systems.

Change history

  • 24 February 2021

    Springer Nature's version of this paper was updated to present the correct the funding statement.

References

  1. Alesina, A., Fuchs-Schündeln, N.: Good-bye Lenin (or not?): the effect of communism on people’s preferences. Am. Econ. Rev. 97(4), 1507–1528 (2007)

    Google Scholar 

  2. Alesina, A., Glaeser, E.L.: Fighting Poverty in the US and Europe. Oxford University Press, Oxford, A World of Difference (2004)

    Google Scholar 

  3. Alesina, A., Rodrik, D.: Distributive politics and economic growth. Q. J. Econ. 109(2), 465–490 (1994)

    Google Scholar 

  4. Arrow, K.J.: Aspects of the Theory of Risk Bearing. Academic Bookstores, Helsinki (1965)

    Google Scholar 

  5. Atkinson, A. B., Bourguignon, F.: Handbook of Income Distribution. Elsevier, Amsterdam (2000)

  6. Binmore, K.: Game Theory and the Social Contract. Volume 1: Playing Fair. MIT Press, Cambridge (1994)

    Google Scholar 

  7. Binmore, K.: Game Theory and the Social Contract. Volume 2: Just Playing. MIT Press, Cambridge (1998)

    Google Scholar 

  8. Binmore, K.: Natural Justice. Oxford University Press, New York (2005)

    Google Scholar 

  9. Binmore, K., Shaked, A.: Experimental economics: where next? J. Econ. Behav. Organ. 73(1), 87–100 (2010)

    Google Scholar 

  10. Blackburn, R.M., Prandy, K.: The reproduction of social inequality. Sociology. 31(3), 491–509 (1997)

    Google Scholar 

  11. Blinder, A.S., Choi, D.H.: A shred of evidence on theories of wage stickiness. Q. J. Econ. 105(4), 1003–1016 (1990)

    Google Scholar 

  12. Bolton, G., Ockenfels, A.: ERC: a theory of equity, reciprocity and competition. Am. Econ. Rev. 90(1), 166–193 (2000)

    Google Scholar 

  13. Boudon, R.: Education, Opportunity, and Social Inequality. Changing Prospects in Western Society. Wiley, New York (1974)

    Google Scholar 

  14. Buchanan, J.M.: The Limits of Liberty. Between Anarchy and Leviathan. University of Chicago Press, Chicago (1975)

    Google Scholar 

  15. Buchanan, J.M., Brennan, J.: The Reason of Rules: Constitutional Political Economy. Cambridge University Press, Cambridge (1985)

    Google Scholar 

  16. Buchanan, A., Mathieu, D.: Philosophy and justice. In: Cohan, R.L. (ed.) Justice. Views from the Social Sciences, pp. 11–45. Plenum Press, New York (1986)

    Google Scholar 

  17. Bundesministerium für Finanzen: Einkommensungleichheit und soziale Mobilität. Gutachten des Wissenschaftlichen Beirats beim Bundesministerium der Finanzen. Berlin (2017)

  18. Butler, T., Watt, P.: Understanding Social Inequality. Sage Publications, London (2007)

    Google Scholar 

  19. Camerer, C.F.: Behavioral Game Theory. Experiments in Strategic Interaction. Princeton University Press, Princeton (2003)

    Google Scholar 

  20. Cappelen, A.W., Konow, J., Sørensen, E.Ø., Tungodden, B.: Just luck: an experimental study of risk-taking and fairness. Am. Econ. Rev. 103(4), 1398–1413 (2013)

    Google Scholar 

  21. Card, D., Mas, A., Moretti, E., Saez, E.: Inequality at work: the effect of peer salaries on job satisfaction. Am. Econ. Rev. 102(6), 2981–3003 (2012)

    Google Scholar 

  22. Cardenas, J.C., Rodriguez, L.A., Johnson, N.: Collective action for watershed management: field experiments in Colombia and Kenya. Environ. Dev. Econ. 16(3), 275–303 (2011)

    Google Scholar 

  23. Charness, G., Rabin, M.: Understanding social preferences with simple tests. Q. J. Econ. 117(3), 817–869 (2002)

    Google Scholar 

  24. Cohn, A., Fehr, E., Götte, L.: Fair wages and effort provision: combining evidence from a choice experiment and a field experiment. Manag. Sci. 61(8), 1777–1794 (2014)

    Google Scholar 

  25. Davis, K., Moore, W.E.: Some principles of stratification. Am. Sociol. Rev. 10(2), 242–249 (1945)

    Google Scholar 

  26. Deutsch, M.: Distributive justice: a social-psychological perspective. Yale University Press, New Haven (1985)

  27. Dupriez, V., Monseur, C., van Campenhoudt, M., Lafontaine, D.: Social inequalities of post-secondary educational aspirations: influence of social background, school composition and institutional context. Eur. Educ. Res. J. 11(4), 504–519 (2012). https://doi.org/10.2304/eerj.2012.11.4.504

    Article  Google Scholar 

  28. Ehmke, T., Siegle, T.: ISEI, ISCED, HOMEPOS, ESCS—Indicators of social background for quantifying social disparity. Z. Erziehungswiss. 8(4), 521–539 (2005). https://doi.org/10.1007/s11618-005-0157-7

    Article  Google Scholar 

  29. Ellingsen, T., Johannesson, M., Mollerstrom, J., Munkhammar, S.: Social framing effects: preferences or beliefs? Games Econ. Behav. 76(1), 117–130 (2012)

    Google Scholar 

  30. Fehr, E., Fischbacher, U.: Why social preferences matter. The impact of non-selfish motives on competition, cooperation and incentives. Econ. J. 112(478), C1–C33 (2002)

    Google Scholar 

  31. Fehr, E., Gintis, H.: Human motivation and social cooperation: experimental and analytical foundations. Annu. Rev. Sociol. 33, 43–64 (2007)

    Google Scholar 

  32. Fehr, E., Schmidt, K.M.: A theory of fairness, competition and cooperation. Q. J. Econ. 114(3), 817–868 (1999)

    Google Scholar 

  33. Fischbacher, U., Gächter, S.: Social preferences, beliefs, and the dynamics of free riding in public good experiments. Am. Econ. Rev. 100(1), 541–556 (2010)

    Google Scholar 

  34. Frank, R.H., Cook, P.J.: The Winner-Take-All Society. Why the Few at the Top Get So Much More Than the Rest of Us. Penguin Books, New York (1996)

    Google Scholar 

  35. Frohlich, N., Oppenheimer, J.A.: Choosing justice in experimental democracies with production. Am. Polit. Sci. Rev. 84(2), 461–477 (1990)

    Google Scholar 

  36. Frohlich, N., Oppenheimer, J.A.: Choosing Justice. An Experimental Approach to Ethical Theory. University of California Press, Berkeley (1992)

    Google Scholar 

  37. Gächter, S., Nosenzo, D., Sefton, M.: Peer effects in pro-social behavior: social norms or social preferences? J. Eur. Econ. Assoc. 11(3), 548–573 (2013)

    Google Scholar 

  38. Gächter, S., Mengel, F., Tsakas, E., Vostroknutov, A.: Growth and inequality in public good provision. J. Public Econ. 150(1), 1–13 (2017)

    Google Scholar 

  39. Gerber, A., Neitzel, J., Wichardt, P.C.: Minimum participation rules for the provision of public goods. Eur. Econ. Rev. 64, 209–222 (2013)

    Google Scholar 

  40. Giesecke, J., Heisig, J.P., Solga, H.: Getting more unequal: rising labor market inequalities among low-skilled men in West Germany. Res. Soc. Stratif. Mobil. 39, 1–17 (2015)

    Google Scholar 

  41. Güth, W., Kocher, M.G.: More than thirty years of ultimatum bargaining experiments: motives, variations, and a survey of the recent literature. J. Econ. Behav. Organ. 108, 396–409 (2014)

    Google Scholar 

  42. Güth, W., Schmittberger, R., Schwarze, B.: An experimental analysis of ultimatum bargaining. J. Econ. Behav. Organ. 3(4), 367–388 (1982)

    Google Scholar 

  43. Güth, W., Kliemt, H., Ockenfels, A.: Fairness versus efficiency. An experimental study of (Mutual) gift giving. J. Econ. Behav. Organ. 50(4), 465–475 (2003)

    Google Scholar 

  44. Hacker, J.S., Pierson, P.: Winner-Take-All Politics. How Washington Made the Rich Richer – And Turned Its Back on the Middle Class. Simon & Schuster, New York (2010)

    Google Scholar 

  45. Harsanyi, J.: Can the Maximin principle serve as a basis for morality? A Critique of John Rawls’s Theory. Am. Polit. Sci. Rev. 69(2), 594–606 (1975)

    Google Scholar 

  46. Henrich, J.: Does culture matter in economic behavior? Ultimatum Game Bargaining among the Machiguenga of the Peruvian Amazon. Am. Econ. Rev. 90(4), 973–979 (2000)

    Google Scholar 

  47. Henrich, J., et al.: ‘Economic Man’ in cross-cultural perspective: behavioral experiments in 15 small-scale societies. Behav. Brain Sci. 28(6), 1–61 (2005)

    Google Scholar 

  48. Holt, C.A., Laury, S.K.: Risk aversion and incentive effects. Am. Econ. Rev. 92(5), 1644–1655 (2002)

    Google Scholar 

  49. Johnson, D.T.: Poverty, Inequality and Social Welfare in Australia. Physica-Verlag, Heidelberg (1996)

    Google Scholar 

  50. Kahneman, D., Tversky, A.: Prospect theory. An analysis of decisions under risk. Econometrica. 47(2), 263–291 (1979)

    Google Scholar 

  51. Kahneman, D., Knetsch, J.L., Thaler, R.: Fairness as a constraint on profit seeking: entitlements in the market. Am. Econ. Rev. 76(4), 728–741 (1986)

    Google Scholar 

  52. Kant, I.: Grundlegung zur Metaphysik der Sitten. Reclam, Stuttgart (2008 [1785])

    Google Scholar 

  53. Kiatpongsan, S., Norton, M.I.: How much (more) should CEOs make? A universal desire for more equal pay. Perspect. Psychol. Sci. 9(6), 587–593 (2014)

    Google Scholar 

  54. Kittel, B., Paetzel, F., Traub, S.: Competition, income distribution and the middle class: an experimental study. J. Appl. Math. 2015, 1–15 (2015)

    Google Scholar 

  55. Kolm, S.-C.: Modern Theories of Justice. MIT Press, Cambridge (1996)

    Google Scholar 

  56. Konow, J.: Accountability and cognitive dissonance in allocation decisions. Am. Econ. Rev. 90(4), 1072–1091 (2000)

    Google Scholar 

  57. Konow, J.: Which is the fairest one of all? A positive analysis of justice theories. J. Econ. Lit. 41(4), 1188–1239 (2003)

    Google Scholar 

  58. Kroll, Y., Davidovitz, L.: Inequality aversion versus risk Averison. Economica. 70(277), 19–29 (2003)

    Google Scholar 

  59. Lenger, A., Schneickert, C., Schumacher, F.: Pierre Bourdieus Konzeption des Habitus. In: Alexander Lenger, Christian Schneickert und Florian Schumacher (Hg.): Pierre Bourdieus Konzeption des Habitus. Grundlagen, Zugänge, Forschungsperspektiven: Springer VS, S. 13–41 (2013)

  60. Lenger, A., Schumacher, F.: Understanding the Dynamics of Global Inequality. Social Exclusion, Power Shift, and Structural Changes. Springer, Heidelberg (2015)

    Google Scholar 

  61. Lynn, R., Vanhanen, T.: IQ and Global Inequality. Washington Summit Publishers, Augusta (2006)

    Google Scholar 

  62. Marger, M.: Social Inequality. Patterns and Processes. McGraw-Hill, Boston (2005)

    Google Scholar 

  63. Milanovic, B.: Worlds apart. Measuring International and Global Inequality. Princeton University Press, Princeton (2005)

    Google Scholar 

  64. Mollerstrom, J., Reme, B.-A., Sørensen, E.Ø.: Luck, choice and responsibility–an experimental study of fairness views. J. Public Econ. 131, 33–40 (2015)

    Google Scholar 

  65. Müller, C.: The methodology of Contractarianism in economics. Public Choice. 113(3/4), 465–483 (2002)

    Google Scholar 

  66. Neckerman, K.M. (ed.): Social Inequality. Sage Publications, New York (2004)

    Google Scholar 

  67. Norton, M.I.: Unequality: who gets what and why it matters. Policy Insights Behav. Brain Sci. 1(1), 151–154 (2014)

    Google Scholar 

  68. Norton, M.I., Ariely, D.: Building a better America – one wealth quintile at a time. Perspect. Psychol. Sci. 6(1), 9–12 (2011)

    Google Scholar 

  69. Norton, M.I., Neal, D.T., Govan, C.L., Ariely, D., Holland, E.: The not-so-common-wealth of Australia: evidence for a cross-cultural desire for a more equal distribution of wealth. Anal. Soc. Issues Public Policy. 14(1), 339–351 (2014)

    Google Scholar 

  70. Nussbaum, M.C.: Frontiers of Justice. Disability, Nationality, Species Membership. The Belknap Press, Cambridge (2006)

    Google Scholar 

  71. OECD: Growing Unequal? Income Distribution and Poverty in OECD Countries. OECD Publishing, Paris (2008)

    Google Scholar 

  72. OECD: Divided we Stand. Why Inequality Keeps Rising. OECD Publishing, Paris (2011)

    Google Scholar 

  73. OECD: In It Together: Why Less Inequality Benefits All. OECD Publishing, Paris (2015)

    Google Scholar 

  74. Okun, A.: Equality and Efficiency: the Big Tradeoff. Brookings, Washington D.C (1975)

    Google Scholar 

  75. Oosterbeek, H., Sloof, R., Van den Kuilen, G.: Cultural differences in ultimatum game experiments: evidence from a meta-analysis. Exp. Econ. 7(2), 171–188 (2004)

    Google Scholar 

  76. Osberg, L., Smeeding, T.: ‘Fair’-inequality? attitudes towards pay differentials: the United States in comparative perspective. Am. Sociol. Rev. 71(3), 450–473 (2006)

    Google Scholar 

  77. Osborn, A.F., Morris, T.C.: The rationale for a composite index of social class and its evaluation. Br. J. Sociol. 30(1), S. 39 (1979). https://doi.org/10.2307/589500

    Article  Google Scholar 

  78. Piketty, T.: Capital in the Twenty-First Century. Harvard University Press, Harvard (2014)

    Google Scholar 

  79. Piketty, T., Saez, E.: Income inequality in the United States, 1913-1998. Q. J. Econ. 118(1), 1–39 (2003)

    Google Scholar 

  80. Rabin, M.: Risk aversion and expected-utility theory: a calibration theorem. Econometrica. 68(5), 1281–1292 (2000)

    Google Scholar 

  81. Rawls, J.: A Theory of Justice. Harvard University Press, Cambridge (1971)

    Google Scholar 

  82. Rousseau, J.-J.: Vom Gesellschaftsvertrag. Reclam, Stuttgart (2003 [1762])

    Google Scholar 

  83. Saad, G., Gill, T.: Sex differences in the ultimatum game: an evolutionary psychological perspective. J. Bioecon. 3(2), 171–193 (2001)

    Google Scholar 

  84. Sen, A.K.: Development as Freedom. Oxford University Press, New Delhi Oxford (1999)

    Google Scholar 

  85. Sen, A.K.: The Idea of Justice. Allen Lane, London (2010)

    Google Scholar 

  86. Shavit, Y., Blossfeld, H.-P.: Persistent Inequality. Changing Educational Attainment in Thirteen Countries. Westview Press, Boulder (1993)

    Google Scholar 

  87. Shayo, M.: A model of social identity with an application to political economy: nation, class, and redistribution. Am. Polit. Sci. Rev. 103(2), 147–174 (2009)

    Google Scholar 

  88. Shipler, D. K. The Working Poor. Invisible in America. Vintage Books, New York (2005)

  89. Smith, A.: The theory of moral sentiments. Empire Books (2011 [1759])

  90. Solnick, S.J.: Gender differences in the ultimatum game. Econ. Inq. 39(2), 189–200 (2001)

    Google Scholar 

  91. Solon, G.: What Do We Know So Far about Multigenerational Mobility? National Bureau of Economic Research Working Paper 21053. Available at http://www.nber.org/papers/w21053. Last accessed 2 Jun 2017 (2015)

  92. Solt, F.: Economic inequality and democratic political engagement. Am. J. Polit. Sci. 52(1), 48–60 (2008)

    Google Scholar 

  93. Starmans, C., Sheskin, M., Bloom, P.: Why people prefer unequal societies. Nat. Hum. Behav. 1(0082), (2017)

  94. Stiglitz, J.E.: The Price of Inequality. How Today’s Divided Society Endangers our Future. W.W. Norton & Co, New York (2012)

    Google Scholar 

  95. Traub, S., Seidl, C., Schmidt, U.: An experimental study on individual choice, social welfare, and social preferences. Eur. Econ. Rev. 53(4), 385–400 (2009)

    Google Scholar 

  96. Wilkinson, R.G., Pickett, K.: The Spirit Level. Why More Equal Societies Almost Always Do Better. Allen Lane, London (2009)

    Google Scholar 

  97. Wolf, S., Lenger, A.: Utilitarianism, the difference principle, or else? An experimental analysis of the impact of social immobility on the democratic election of distributive rules. In: Lütge, C., Rusch, H., Uhl, M. (eds.) Experimental Ethics. Toward an Empirical Moral Philosophy, pp. 94–111. Palgrave Macmillan, Houndmills (2014)

    Google Scholar 

  98. Wolff, E.N.: Top Heavy. Increasing Inequality of Wealth in America and What Can Be Done About It. New Press, New York (2002)

    Google Scholar 

  99. Wyss, R.: The Tolerance Premium as a Constitutional Element of the Protective and Welfare State. Constitutional Economics Network Working Papers 01–2011 (2011)

  100. Zagorsky, J.L.: Do you have to be smart to be rich? The impact of IQ on wealth, income and financial distress. Intelligence. 35(5), 489–501 (2007)

    Google Scholar 

Download references

Funding

Open Access funding enabled and organized by Projekt DEAL.

Author information

Affiliations

Authors

Corresponding author

Correspondence to Stephan Wolf.

Additional information

Publisher’s Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Electronic supplementary material

ESM 1

(DOCX 211 kb)

Rights and permissions

Open Access This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article's Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://creativecommons.org/licenses/by/4.0/.

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Lenger, A., Wolf, S. & Goldschmidt, N. Choosing inequality: how economic security fosters competitive regimes. J Econ Inequal (2020). https://doi.org/10.1007/s10888-020-09472-5

Download citation

Keywords

  • Decision making
  • Experiment
  • Inequality
  • Information
  • Justice
  • Social choice
  • Social contract
  • Social immobility
  • Stratification

Jel classification

  • C91
  • C92
  • D31
  • D63
  • D71
  • D81
  • D90