According to a recent report (Alvaredo et al., 2018) we live in a world of growing inequalities, where the top one percent of rich people is constantly increasing its earnings, while the majority of the world population have experienced a stagnant income during last decades. Starting from this evidence we try to answer the following research question: why do people tolerate inequality even when they would benefit from redistribution without bearing its cost? Current research has mainly focused on the role of beliefs about social mobility (Benabou and Ok, 2001), on social preferences (Fong, 2001) or on positional concerns (Kuziemko et al., 2014). We add to this literature by proposing and empirically testing the alternative hypothesis that preferences for inequality and redistribution strongly depend on loss aversion. In their seminal paper, Tversky and Kahneman (1991) show that people preferences depend from a reference point and that they evaluate losses more than gains. Our project aims to include this insight to the literature on preferences for redistribution. Most likely, loss aversion has several impacts on preferences for redistribution. It might explain why rich people are so reluctant to give out money, but it might also shed lights on why low-income individuals might tolerate inequality if they are lossless. To investigate the role of loss aversion we assess the impact of policy actions reducing the risk of income losses, such as the introduction of a minimum wage or the introduction of the citizen¿s income.
Notwithstanding the prolific research about preferences for redistribution there is room for improvement. The existing literature is often in contrast with evidence. If on one side it has been found that the prospect of upward mobility might be a reason why low income people tolerate inequality, the reality that people face is that there is poor social mobility (OECD, 2018). Furthermore, even if beliefs have been found to be a driver of preferences for inequality, some recent contributions have shown that also inequality might shape beliefs. For example, Mijs (2019) shows that people who have grown up in period of growing inequality develop a more meritocratic view. The novelty of our work is the provision of an alternative explanation of the individual
tolerance of inequality and support for redistribution. Indeed, our contribution indicates that people might tolerate inequality if they are in a lossless environment. This could explain why people might tolerate inequality even if they live in societies with scarce social mobility. Moreover, this interpretation might be more complete than the one given by the last place aversion hypothesis. Since people miss to rightly evaluate their own social position (see e.g. Cruces et al., 2013), it is sensible to believe that, out of lab, they miss to rightly evaluate whether they are at the last place or second-last place of the social scale. Lastly, our proposal helps to understand the complex mechanism between people perception about inequality and the implementation of policy measures such as the introduction of the minimum wage or the introduction of a basic income.
References
Cruces, G., Perez-Truglia, R., and Tetaz, M. (2013). Biased perceptions of income distribution and preferences for redistribution: Evidence from a survey experiment. Journal of Public Economics, 98:100¿112.
Mijs, J. J. (2019). The paradox of inequality: income inequality and belief in meritocracy go hand in hand. Socio-Economic Review.
OECD (2018). A Broken Social Elevator? How to Promote Social Mobility.