We report a lab experiment to study subjects’ preferences over their ordinal rank in an earnings distribution. Following an assignment of unequal earnings, subjects can select a monetary transfer from exactly one individual to another, not including themselves. This can potentially change their own position in the distribution, as well as influence overall inequality. The experiment varies whether the initial earnings assignment is random or is affected by preliminary competition. It also varies the reference group from a complete to a partial network. A majority of observed transfers reduce inequality by moving earnings from those with the highest rank to the lowest rank in the distribution. Rank-improving transfers are substantially more common for preliminary competition losers than winners. Transfers to individuals outside of the reference group are not uncommon, and they usually target as the source the individuals high in the income distribution. While generally weak overall, own rank preferences appear to be more common among men than women.

We assess how an economy’s wealth distribution shapes its labor market dynamics. We do so in a quantitative job-ladder model featuring directed search, incomplete markets, aggregate shocks, and endogenous on-the-job human capital accumulation. Poorer workers apply for lower-wage jobs when unemployed and under-accumulate human capital when employed to self-insure against unemployment risk. In response to an aggregate downturn, poorer workers reduce their human capital accumulation, all else equal, while richer workers increase it. The wealth distribution therefore matters for the response of aggregate human capital. In the calibrated model, we show that a negative aggregate productivity shock leads to a persistent decline in aggregate human capital, and a more dispersed wealth distribution would amplify this decline.

We performed a field experiment in Uruguay in which a 20-year-old chooses between a socially visible and a non-socially visible good after a friend randomly received one of these goods or an unknown one. We find no differences in choices when the friend received the nonvisible good instead of the unknown one. However, decision-makers significantly changed their allocation when their friend received the visible good. Consistent with status concerns driving the results, those in a disadvantaged position consumed more and those in an advantaged position consumed less of the visible good. These findings constitute the first experimental evidence of Duesenberry’s demonstration effects and show that status consumption is a relevant phenomenon among the youth in a developing country setting.

In response to tire failures and vehicle rollover accidents, most notably those experienced by Ford Explorers with Firestone Tires, the 106th Congress and President Clinton enacted the Transportation Recall Enhancement, Accountability, and Documentation (TREAD) Act of 2000. Section 13 of the TREAD Act requires vehicle manufacturers to install tire pressure monitoring systems (TPMS) that alert drivers when a tire is significantly under-inflated. This paper first discusses the political economy that ultimately led to the final TREAD Act TPMS regulation. Then, relying on the variation of model-year TPMS introduction, I investigate whether and to what extent TPMS reduces all vehicle fatalities and those associated with tire failure and improper inflation. I find that the introduction of TPMS is associated with just over 11 fewer tire failure-related deaths per year, resulting in a net benefit of −$752 million to −$1,876 million (in $2001) per year. I find no change in the number of tire inflation-related fatalities with the introduction of TPMS.

John Stuart Mill claimed that “men do not desire merely to be rich, but richer than other men.” Are people made happy by being richer than others? Or are people made happy by favorable comparisons to others more generally, and being richer is merely a proxy for this ineffable relativity? We conduct an online experiment absent choice in which we measure subjective well-being (SWB) before and after an exogenous shock that reveals to subjects how many experimental points they and another subject receive, and whether or not points are worth money. We find that subjects are made significantly happier when they receive monetized rather than non-monetized points, suggesting money is valued more than the points it represents. In contrast, subjects are made equally unhappy when they receive fewer monetized points as when they receive fewer non-monetized points than others, suggesting relative money is not valued more than the relative points it represents. We find no evidence that subjects are made happier by being “richer” than others (i.e., by receiving more points—either monetized or non-monetized—than others). Subgroup analyses reveal women are made unhappier (than men) by being “richer” and “poorer” than others, and conservatives are made unhappier (than progressives) by being “poorer” than others. Our experimental-SWB approach is easy to administer and may complement choice-based tasks in future experiments to better estimate preference parameters.

Preferences over social ranks have emerged as potential drivers of weaker than expected support for redistributive interventions among those closest to the bottom of the income distribution. We compare preferences for alterations of the income distribution affecting the decision maker’s social rank, but not their income, and compare them with similar alterations leaving both rank and income unchanged. Our study fails to find evidence of last-place aversion in a replication of Kuziemko et al. (Q J Econ 129(1):105–149, 2014). However, using a modified design that holds ranks fixed across rounds we find support for both a discontinuously greater disutility from occupying the last as opposed to higher ranks, thus affecting only those closest to the bottom of the distribution, and for a general dislike of rank reversals affecting most ranks. We discuss implications for policy design in both public finance and management science.

Previous literature demonstrates that beliefs about the determinants of income inequality play a major role in individual support for income redistribution. This study investigates how people form beliefs regarding the extent to which work versus luck determines income inequality. Specifically, I examine whether people form self-serving beliefs to justify supporting personally advantageous redistributive policies. I use a laboratory experiment where I directly measure beliefs and manipulate the incentives to engage in self-deception. I first replicate earlier results demonstrating that (1) people attribute income inequality to work when they receive a high income and to luck when they receive a low income and (2) their beliefs about the source of income inequality influence their preferences over redistributive policies. However, I do not find that people’s beliefs about the causes of income inequality are further influenced by self-serving motivations based on a desire to justify favorable redistributive policies. I conclude that, in my experiment, self-serving beliefs about the causes of income inequality are driven primarily by overconfidence and self-image concerns and not to justify favorable redistributive policies.

An inequality game is an asymmetric 2 × 2 coordination game in which player 1 earns a substantially higher payoff than player 2 except in the inefficient Nash equilibrium (NE). The two players may have either common or conflicting interests over the two NE. This paper studies a redistribution scheme which allows the players to voluntarily transfer their payoffs after the play of an inequality game. We find that the redistribution scheme induces positive transfer from player 1 to player 2 in both common- and conflicting- interest games, and is particularly effective in increasing efficient coordination and reducing coordination failures in conflicting-interest games. We explain these findings by considering reciprocity by player 1 in response to the sacrifice made by player 2 in achieving efficient coordination in conflicting-interest games.

This paper investigates the long-run nexus between wealth inequality and aggregate output using a DSGE model in which wealth inequality endogenously affects individual entrepreneurship incentives, thereby influencing aggregate output. Our model passes the indirect inference test against the UK data from 1870 to 2015. We find that shocks to aggregate TFP, entrepreneurial barriers, government grant support and general government spending played significant roles in shaping historical inequality dynamics in the UK. Directly removing entrepreneurial barriers or indirectly providing government grant support to the private sector such as through inclusive loan subsidies are effective means of reducing inequality and stimulating output growth.

We use a comprehensive new dataset of asset-class returns in 38 developed countries to examine a popular class of retirement spending rules that prescribe annual withdrawals as a constant percentage of the retirement account balance. A 65-year-old couple willing to bear a 5 percent chance of financial ruin can withdraw just 2.31 percent per year, a rate materially lower than conventional advice (e.g., the 4% rule). Our estimates of failure rates under conventional withdrawal policies have important implications for individuals (e.g., savings rates, retirement timing, and retirement consumption), public policy (e.g., participation rates in means-tested programs), and society (e.g., elderly poverty rates).

We conduct two experiments using a demographically diverse online subject pool to investigate total and extensive price elasticities of giving by age, income, gender, political ideology, and religiosity. A first exploratory experiment finds that religious subjects give more, are more likely to give, and are less sensitive to the price of giving than non-religious subjects. We find no statistically significant differences in price elasticities by age, income, gender, or political ideology. A second pre-registered experiment confirms these findings.

This paper studies the heterogeneity of households’ present bias in a heterogeneous-agent model. Our model jointly matches the average marginal propensities to consume and the wealth distribution in the USA, even when all wealth is liquid. A fiscal stimulus targeting households in the bottom half of the wealth distribution improves the consumption response. A financial literacy campaign removing present bias gets naive households out of the debt trap but harms sophisticated households’ wealth accumulation due to a lower equilibrium interest rate. Finally, we show that a borrowing cost penalty and illiquidity both discipline excessive borrowing and are therefore potential remedies for present bias and naivete.

This paper, building on new archival research and the social table method, presents comprehensive estimates of income inequality in Mexico in 1895, 1910, 1930 and 1940. Inequality grew from 1895 to 1910, driven by economic expansion within the context of an oligarchic economy. While real income increased for the lower classes during this period, the main beneficiaries were large landowners and entrepreneurs. In the revolutionary period from 1910 to 1930 inequality decreased especially as a result of land reforms, benefitting peasants at the expense of the large landowners. However, the economic structure of the country was not fundamentally changed, and in the 1930s inequality raised as incomes of peasants and those in the informal sector fell behind manufacturing and other high-earning sectors. The Mexican case shows the complex interaction of economics, demography and politics in determining economic inequality.

Motivated by distributional concerns raised by recent breakthroughs in AI and robotics, we ask how workers would prefer to manage an episode of automation in a task-based model, which distinguishes between automation and traditional technical progress. We show that under majority voting with the option to implement a “partial” UBI (as transfers to workers) it is optimal to tax capital at a higher rate than labor in the long run to fund the partial UBI. We show that, unlike traditional technical progress, automation always lowers the labor share in the long run, justifying distributional concerns. A quantitative analysis of an episode of automation for the US economy shows that it is optimal from the workers’ perspective to lower capital taxes and transfers over the transition. Nevertheless, this policy increases worker welfare by only 0.7% in consumption-equivalent terms, compared with a 21.6% welfare gain to entrepreneurs, because the welfare gains to workers from lower capital taxes are second-order, while the gains to entrepreneurs are first-order.

This paper explores whether a positive unexpected exogenous (unearned) wealth shock affects household structure decisions in different Spanish regions. The Christmas draw of the Spanish National Lottery is used in a natural experiment as a proxy for exogenous random variations in provincial wealth. A static and dynamic linear panel event-study design allows for control of changing economic and demographic conditions at the province level and the dynamic effects on the analyzed decisions. The evidence is consistent with families getting divorced and having children when the province in which they live experiences an unexpected increase in wealth, but no conclusive effect on wedding plans is found.

The canonical income process, including autoregressive, transitory, and fixed effect components, is routinely used in macro and labor economics. We provide a guide for its estimation using quasidifferences, cataloging biases in the estimated parameters for various $N$, $T$, initial conditions, and weighting schemes. Using Danish administrative data on male earnings, estimation in quasidifferences yields divergent estimates of the autoregressive parameter for different weighting schemes, which conforms to our simulation results when the variance of transitory shocks is higher than that of persistent shocks, true persistence is high, and the persistent component’s variance in the first sample year is nonzero. We further apply quasidifferences to the data from a calibrated lifecycle model and find significant biases in the persistence of shocks and their insurance. Estimation of the income process using quasidifferences is reliable only when the variance of persistent shocks is higher than that of transitory shocks and the moments are equally weighted.

The rapid widening of wealth inequalities has led to sharp differences in living standards in Great Britain. Understanding whether and separately the rate at which individuals accumulate particular types of wealth by family background is important for improving wealth and social mobility. We show offspring wealth inequality is driven by housing wealth, and holding such wealth is becoming increasingly associated with early life circumstances relating to parental housing tenure and education, even after controlling for adult offspring’s own characteristics. Importantly, we find adult offspring whose parents hold a degree and are homeowners are no less likely to report homeownership and housing wealth compared to older cohorts from the same background. Our findings infer the intergenerational rank correlation in housing wealth is set to double in approximately three decades.

This study uses three wealth modules from the Household, Income and Labour Dynamics in Australia Survey to explore the gender wealth gap for single Australian households between 2002 and 2010. The findings indicate a significant gender wealth gap, which has increased over the 8 years explored. Most of the increase in the wealth gap was associated with a relatively rapid increase in the value of housing assets by single men over the study period. The findings of this study challenge a wider literature that tends to emphasise that men are more prepared to invest in ‘risky’ assets such as shares and that their higher wealth is due to these investment strategies. Instead, this study emphasises how, in the Australian context at least, it was higher growth rates in the value of housing assets owned by single men that improved their wealth position relative to single women over the last decade.

Australian social policy has seen apparently contradictory developments over the period of economic restructuring. Social spending has increased based on a highly redistributive model while inequality has grown. This article explores the relationship between Australia’s experience of economic restructuring and the political dynamics of an emerging ‘dual welfare state’. Importantly, the article argues that Australian reformers did not reject the state per se, nor egalitarianism as an objective. Instead, reform sought to combine greater competition with compensation, generating larger inequalities in market incomes alongside growing social spending. The article explores how Labor combined neoclassical ideas about competition with a commitment to a ‘small state’ version of social democracy. This did moderate inequalities through the period of restructuring, but it also altered the dynamics of political contestation. The article provides two typologies to understand this political dynamic, arguing forms of marketisation opened the door to a political contest over the nature, rather than the extent, of public provision, while the model of targeting reinforced paternalist tendencies inherent in neoliberal reform.