Deprivation, Complaints and Inequality

1. Deprivation, Complaints and Inequality Public Economics: University of Barcelona Frank Cowell http://darp.lse.ac.uk/ub June 2005

2. Overview... Deprivation, complaints, inequality Experimental approaches Background to further work Deprivation Complaints Claims

3. Agenda • Begin with a look at some empirical work • To what extent are ideas in previous lectures supported? • Focus on • Risk and inequality aversion • The fundamental axioms • The context of distributional comparisons • Role of personal characteristics

4. Risk and inequality aversion • Examine preferences for risk and inequality • Carlsson et al 2005 • Use imagined societies and lotteries. • Willingness to provide for grandchildren? • Relative risk aversion is between 2 and 3. • Social inequality aversion? • Most people also individually inequality averse • Willing to pay for living in a more equal society • Left-wing voters and women are both more risk and inequality averse than others.

5. Background • Research programme by Amiel and Cowell • Several references summarised in Amiel-Cowell (1999) • Recent work in Amiel et al (2005) • Examine the extent to which individual axioms are supported. • Also the role of personal characteristics • sex • age • economics education • political views

6. How do the axioms compare? Source: Amiel and Cowell (1999)

7. Recent work • Part of a research programme that focuses on the way people perceive issues • Lesson 1 from the past: individuals consistently reject some of the core principles • Pareto principle • Transfer principle • Lesson 2 from the past: context may be important • Inequality • Welfare… • Can we pin down the context effect?

8. Beginnings of an approach • Set up a joint “questionnaire experiment” • Simultaneously use a variety of ethical settings • Same experiment in different flavour • Should the “flavouring” matter? • Systematic differences across settings? • Special personal characteristics predispose a particular set of attitudes? • Throw light on the ethical basis for concern with distributional issues? • What issues?

9. Distributional issues • Could look at questions of monotonicity / Pareto principle • Transfer principle • Close relation to mean-preserving spread principle • Serious question here at heart of inequality and risk analysis • Recall the transfer principle example…

10. $ 10 11 12 13 0 1 2 3 4 5 6 7 8 9 $ 10 11 12 13 0 1 2 3 4 5 6 7 8 9 Which group seems to have the more unequal distribution?

11. $ 10 11 12 13 0 1 2 3 4 5 6 7 8 9 $ 10 11 12 13 0 1 2 3 4 5 6 7 8 9 Mrs Amiel’s Answer

12. $ 10 11 12 13 0 1 2 3 4 5 6 7 8 9 $ 10 11 12 13 0 1 2 3 4 5 6 7 8 9 The “Truth”

13. What if we had used a different distributional criterion? • Following Atkinson, inequality rankings should derive from social welfare rankings • Likewise risk rankings should derive from preference rankings • What would have happened if we changed the context of the question? • Should just be a matter of changing the flavour • Not the substance • Consider the risk-inequality relation

14. Harsanyi: the two models • There may be conceptual problems • Are the models actually distinct? • Nevertheless, an important foundation of modern utilitarianism • Should be susceptible of investigation as with the inequality questionnaire experiments

15. Outline of Approach • Questionnaire responses of international group of over 1000 students • Questionnaire experiments were run during 2003 • Each session run during lecture/class time • Questionnaire consisted of a combination of (related) numerical problems and a verbal question • Experiment was anonymous, but individuals were asked about personal characteristics

16. The setting • An imaginary country: Alfaland • Consists of 5 regions • equality of income within each region • income of each region depends on policy chosen. • One of two policies A, B is to be implemented • distributional consequences are known • What is respondent’s judgment on the outcomes? • Do this for six scenarios • Allow for indifference • An example…

17. The Questionnaire

18. Seven flavours In each case please state which policy you consider… • would result in higher inequality in Alfaland • would result in higher risk for a person immigrating to Alfaland • would result in higher risk for you as an immigrant to Alfaland • would result in a better situation in Alfaland • would result in a better situation in Alfaland • as more just for Alfaland • would result in a fairer situation in Alfaland Imagine that you are invited to be an outside observer of Alfaland. Imagine that you have been assigned to one of the regions in Alfaland with an equal chance of being in any one of the five regions. Imagine that you have been assigned to one of the regions in Alfaland, but you do not know which one.

19. Features of Questionnaire: 1 • Seven questionnaires for the price of one • For example risk questionnaire generated from inequality by Ctrl-H • Others in the same way. • Students ranked six pairs of income vectors (A and B) in terms of risk and inequality • For each question B obtained from A by an equalising income transfer from a rich to a poor region • Transfer Principle (mps principle) implies that A is riskier/more unequal than B in all six questions

20. Numerical Questions

21. Features of Questionnaire 2 • Check the numerical responses with a verbal question • Using the same story we present the issue of the principle of transfers • Then see if they want to change their minds on the numerical problems

22. risk risk risk risk Questionnaire: Verbal Part …and for risk

23. Questionnaire: A Check

24. The Questionnaire: Personal Characteristics

25. The respondents • Drawn from three countries: • Germany: 344 • Israel: 362 • UK: 309 • Balance of male/female respondents • males: 561 • females: 426 • (some unknown!) • Both economists and non-economists

26. Responses to numerical questions • Could examine each numerical question separately • Or (more appropriately?) as a collection of 6 • To be consistent with the theory should have the pattern • AAAAAA for inequality/risk • BBBBBB for welfare, justice fairness • What is the proportion of orthodox individual-Q responses? • What is the proportion of orthodox patterns? • Do they differ by flavour? • First a look at results from a previous study involving just inequality and risk. • Respondents from Argentina, Belgium, Germany, Israel, UK.

27. Inequality Risk Variable Coef P > |z| Coef P > |z| P > c2 0.12 1 0.21 0 16 Male 0.10 9 0.14 1 56 Economic Subject 0.00 90 0.01 41 60 Age 0.02 54 -0.01 88 58 Employment -0.01 45 -0.01 33 90 Political opinion 0.00 88 0.00 76 74 Income 1990 0.02 21 -0.01 48 15 Income Change 2010 Explanatory variables include dummy variables for countries. Number of observations 1153. Probit Regression of 6 x Response A Equality of coefficients across subgroups. • male and economic subject lead to higher share of A responses, especially for risk

28. From previous studies • Consistent violations of standard distributional axioms • Both special subject and male/female were important • More male than female students view equalising transfer as risk/inequality reducing, on each question separately • Also true for consistency with Transfer Principle • Male/female differences are larger for risk than inequality • Respondents are more likely to view equalising transfers as risk/inequality reducing when occurring from upper to lower end of distribution rather than ‘within’ the distribution • The transfer type matters more for female and for risk

29. Numerical Questions: Detail

30. Response patterns overall Strict adherence to axiom is very low “Negative” questions get fewer orthodox answers Cases involving extremes get more support H1 dominates H2?

31. Overall results • Responses violate transfer (mps) principle • Question pattern similar to previous studies • Extremes produce orthodox responses • Positive flavours exhibit higher proportion of orthodox responses • Involvement?

32. Involvement • Same issues for risk and for welfare? • Is there a male/female effect? • Yes if we are looking from Olympian detachment…

33. Males-females risk Non-involved risk. Males more orthodox Does not hold for involved risk.

34. Males-females Harsanyi Outside observer. Males more orthodox? Does not hold for involved observer

35. Regression Approach • Consider equation of the form: • Prob(answer B)= F(b1x1 +b2x2 +…+bnxn) • Estimate this using probit if F is standard normal • Personal characteristics can be used as dummies • Also flavours… • Also country subsamples

36. significant at 1% level significant at 5% level significant at 10% level Specification 1

37. significant at 10% level significant at 1% level significant at 5% level Specification 2

38. Regression results • For regressions on the whole set of flavours… • Get different picture of personal characteristics: • Sex and economics not significant • Perhaps political views are significant • But two things come through clearly • Importance of flavour (neg/pos) • Role of country dummies • Look more closely at subsamples

39. UK subsample: H1 dominates?

40. Germany subsample: H1 dominates

41. Israel subsample: H2 dominates!

42. A second go • Results from Israel were truly remarkable • Were they a fluke from the specific sample? • Try a second sample 18 months later • Just focus on the Harsanyi flavours • 51 H1 flavour (outside observer) • 50 H2 flavour (involved observer) • Again look at breakdown by questions

43. Israel 2005: H2 dominates again

44. Conclusions • Move beyond simple question of transfer/mps principle • Importance of cultural background? • H1 and H2 not the same • In some ways reflect response patterns on risk

45. Overview... Deprivation, complaints, inequality Experimental approaches An economic interpretation of a sociological concept Deprivation Complaints Claims

46. A way forward • We will look at recent theoretical developments in distributional analysis • Focus on alternative approaches to inequality • Use ideas from sociology and philosophy • Adopt the same axiomatic approach as was used for Poverty

47. “Structural” axioms • Take some social evaluation function F... • Continuity • Linear homogeneity • Translation invariance

48. Structural axioms: illustration • D for n=3 • An income distribution • Perfect equality • Contours of “Absolute” Gini • Continuity • Continuous approach to I = 0 • Linear homogeneity • Proportionate increase in I • Translation invariance • I constant x2 x* • 1 • x3 0 x1

49. Individual deprivation • The Yitzhaki (QJE 1979) definition • Equivalent form • In present notation • Use the conditional mean

50. Deprivation: Axiomatic approach 1 • The Better-than set for i • Focus • works like the poverty concept