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Marcel Preuss, Mannheim U. Print
Friday, 16 December 2016, 12:15 - 13:15

ENTER Seminar 

Marcel Preuss, Mannheim University

Relative Earnings and Fairness

Abstract: I study the effect of relative earnings on fairness ideals to establish a better understanding of how wealth inequality evolves over time. We answer this question by using an experimental design that enables subjects to earn their endowments but still allows us to control for effort and income at the end of the earnings phase. In the main part of the experiment, subjects learn about the income and effort levels of all players from their group and are asked to distribute additional money between two of them. By distributing more than half of the money to the poorer player from their choice set, most subjects reveal that they perceive the payoff difference resulting from the earnings phase as unfair. I observe that in situations requiring people to give up their rank by giving to the poorer of the two players, they are less likely to do so. Moreover, everything else equal, the higher the decision maker’s own earnings, the less s/he distributes to the poorer of the two players. This evidence suggests that an individual’s preference for redistributive policies might be shaped by her affiliation to a particular income class even in the absence of a need to reduce cognitive dissonance arising from trading off her own payoff with fairness. Rank-loss aversion, rational learning from experience and an illusion of control can explain the results.

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