Economist Writing Every Day

Most people would consider both equality and efficiency to be good. They are “goods” in the sense that more of them makes us happier.  However, in some situations, there is a trade-off between having more equality and getting more efficiency. Extreme income redistribution makes people less productive and therefore lowers overall economic output.

Examining the preferences people have for efficiency and equality is hard to do because the world is complicated. For example, a lot of baggage comes along with real world policy proposals to raise(lower) taxes to do more(less) income redistribution. A voter’s preference for a particular policy could be confounded by their personal feelings toward a particular politician who might have just had a personal scandal.

With Gavin Roberts, I ran an experiment to test whether people would rather get efficiency or equality (paper on SSRN). Something neat that we can do in a controlled lab setting is systematically vary the prices of the goods (see my earlier related post on why it’s neat to do this kind of thing in the lab).

One wants to immediately know, “Which is it? Do people want equality or efficiency?”. If forced to give a short answer, I would say that the evidence points to equality. But overly simplifying the answer is not helpful for making policy. The demand curve for equality slopes down. If the price of equality is too high, then people will not choose it. In our experiment, that price could be in terms of either own income or in group efficiency. We titled our paper “Other People’s Money” because more equality is purchased when the cost comes in terms of other players’ money.

The main task for subjects in our experiment is to choose either an unequal distribution of income between 3 players or to pick a more equal distribution. Given what I said above that people like equality, you might expect that everyone will choose the more equal distribution. However, choosing a more equal distribution comes at a cost. Either subjects will give up some of their own earnings from the experiment or they will lower the total group earnings. As is true in policy, some schemes to reduce inequality are higher cost than others. When the cost is low, we observe many subjects (about half) paying to get more equality. However, when the cost is high, very few subjects choose to buy equality.

This bar graph from our working paper shows some of the average behavior in the experiment, but it does not show the important results about price-sensitivity.

The red bars for “Efficiency Constant” show how many people choose the more equal distribution of money when the payment for more equality reduces their own earnings. Overall, only 1/3 of people are willing to buy equality if they have to give up their own money. However, what this figure does not show is that half of people will buy equality with their money if they can buy a lot of equality at a low price. Conversely, almost no one will buy equality with their own money when the price is high.

Good policies present voters with attractive choices that make society better. There are, of course, bad policy initiatives. If voters believe that a legislator is trying to decrease inequality at a high cost to them personally, then it may appear that they don’t care about inequality at all. We can only observe a few actual vote results per district over a few policy proposal bundles.

Over 60% of subjects choose equality, in our experiment, if they can get it by reducing group efficiency just a bit and without having to give up any of their own money. That’s a good deal, to them. Does that mean the people care more about equality than efficiency, in general? Again, the price matters. If the chooser can see that more equality will come at a high cost to group efficiency, then they are unlikely to choose the option that reduces inequality. Even when they are spending “other people’s money”, we find that subjects are price-sensitive (which confirms some results from Andreoni & Miller 2002).