Income Inequality and Social Preferences for Redistribution and Compensation Differentials

48 Pages Posted: 3 Jan 2012

See all articles by William Kerr

William Kerr

Harvard University - Entrepreneurial Management Unit

Multiple version iconThere are 3 versions of this paper

Date Written: December 20, 2011

Abstract

In cross-sectional studies, countries with greater income inequality typically exhibit less support for government-led redistribution and greater acceptance of wage inequality (e.g., United States versus Western Europe). If individual nations evolve along this pattern, a vicious cycle could form with reduced social concern amplifying primal increases in inequality due to forces like skill-biased technical change. Exploring movements around these long-term levels, however, this study finds mixed evidence regarding the vicious cycle hypothesis. On one hand, larger compensation differentials are accepted as inequality grows. This growth in differentials is of a smaller magnitude than the actual increase in inequality, but it is nonetheless positive and substantial in size. Weighing against this, growth in inequality is met with greater support for government-led redistribution to the poor. These patterns suggest that short-run inequality shocks can be reinforced in the labor market but do not result in weaker political preferences for redistribution.

Keywords: Inequality, Social Preferences, Social Norms, Redistribution, Welfare, Class Warfare

JEL Classification: D31, D33, D61, D63, D64, D72, H23, H53, I38, J31, R11

Suggested Citation

Kerr, William R., Income Inequality and Social Preferences for Redistribution and Compensation Differentials (December 20, 2011). Harvard Business School Entrepreneurial Management Working Paper No. 12-048. Available at SSRN: https://ssrn.com/abstract=1978919 or http://dx.doi.org/10.2139/ssrn.1978919

William R. Kerr (Contact Author)

Harvard University - Entrepreneurial Management Unit ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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