2005 FairnessandRedistribution

• (Alesina & Angeletos, 2005) ⇒ Alberto Alesina, and George-Marios Angeletos. (2005). “Fairness and Redistribution:Fairness and Redistribution: US versus Europe.” In: American Economic Review, 95(4).

Subject Headings: Social Competition, Fairness.

Cited By

• http://scholar.google.com/scholar?q=%222005%22+%5Bhttp%3A%2F%2Fdash.harvard.edu%2Fbitstream%2Fhandle%2F1%2F4553009%2Falesinassrn_fairness.pdf+Fairness+and+Redistribution%5D

Quotes

Abstract

Different beliefs about the fairness of social competition and what determines income inequality influence the redistributive policy chosen in a society. But the composition of income in equilibrium depends on tax policies. We show how the interaction between social beliefs and welfare policies may lead to multiple equilibria or multiple steady states. If a society believes that individual effort determines income, and that all have a right to enjoy the fruits of their effort, it will choose low redistribution and low taxes. In equilibrium, effort will be high and the role of luck will be limited, in which case market outcomes will be relatively fair and social beliefs will be self-fulfilled. If, instead, a society believes that luck, birth, connections, and/or corruption determine wealth, it will levy high taxes, thus distorting allocations and making these beliefs self-sustained as well. These insights may help explain the cross-country variation in perceptions about income inequality and choices of redistributive policies.

1 Introduction

In the United States the redistribution of income from the rich to the poor is much more limited than in continental Western Europe (“Europe” in short), at least in part because of different perceptions about the sources of income inequality. Many more Americans than Europeans believe that poverty is due to lack of effort rather than bad luck or “social injustice”. Americans perceive wealth as the outcome of individual talent, effort, and entrepreneurship; and, given that effort determines success, they believe that the poor could raise out of poverty if they really tried. Europeans instead view poverty a trap, which unlucky people fall in. According to the World Value Survey, 71 per cent of Americans versus 40 per cent of Europeans believe that the poor could become rich if they just tried hard enough; and a larger proportion of Europeans than Americans (25 per cent versus 16 per cent) believe that income and success is mostly due to luck. So, who is right, the Americans who think that effort determines success, or the Europeans who think that it is mostly luck?

This paper shows that both Americans and Europeans can be correct in their beliefs about what determines income, even if there are no intrinsic differences in economic fundamentals between the two places. That is, in equilibrium it can be the case that luck is more important in Europe, while effort is more important in the United States, even if preferences, technologies, and “nature” (i.e. the exogenous statistical properties of the variables “luck”, “talent”, and “willingness to work”) are the same in the two places. Different levels of government redistribution can then be the result of different beliefs that are unbiased and truly reßect the actual relative weights of luck and effort in the income distribution, beliefs that are actually self-fulÞlling.

The key element that drives our results is the idea of “social justice” or “fairness”. With these terms we capture a social preference for reducing the degree of inequality induced by luck while rewarding individual talent and effort. In this paper we assume that a common desire for fairness is embedded in individual preferences and take these preferences for granted; we show emprical evidence in support of this type of preferences. While we take them as given here, we can think of such preferences either as an evolutionary-stable behavioral attribute,2 or as a social norm that attempts to support a socially preferable outcome.3 For example, if individuals are risk averse and expect uncertainty (“luck”) in their lives but also differ in their talent, patience, or willingness to work, all individuals will favor a social mechanism that provides insurance against luck, but not all individuals will favor redistribution across different levels of talent and effort. A preference for fairness may thus reßect a demand for social insurance — insurance is, in fact, one of the main motivations of the welfare state (e.g., Rawls, 1971). Moreover, to the extent that talent and skill reßects past investment decisions (such as education or entrepreurship), there are efficiency gains in rewarding talent and skill. On the other hand, “luck” may represent the effect of corruption, rent seeking, political subversion, theft, fraud, and the like — activities that involve large private but no social beneÞts,4 and are naturally treated by society as “unjust”.

References

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	Author	volume	Date Value	title	type	journal	titleUrl	doi	note	year
2005 FairnessandRedistribution	Alberto Alesina George-Marios Angeletos			Fairness and Redistribution						2005