Biased Perceptions of Income Distribution and Preferences for Redistribution: Evidence from a Survey Experiment

May 27, 2011

By: Cruces, Guillermo (CEDLAS-UNLP)
Perez Truglia, Ricardo (Harvard University)
Tetaz, Martin (CEDLAS-UNLP)


Individual perceptions of income distribution play a vital role in political economy and public finance models, yet there is little evidence regarding their origins or accuracy. This study examines how individuals form these perceptions and posits that systematic biases arise from the extrapolation of information extracted from reference groups. A tailored household survey provides original evidence on the significant biases in individuals’ evaluations of their own relative position in the distribution. Furthermore, the data supports the hypothesis that the selection process into the reference groups is the source of those biases. Finally, this study also assesses the practical relevance of these biases by examining their impact on attitudes towards redistributive policies. An experimental design incorporated into the survey provides consistent information on the own ranking within the income distribution to a randomly selected group of respondents. Confronting agents’ biased perceptions with this information has a significant effect on their stated preferences for redistribution. Those who had overestimated their relative position and thought of themselves relatively richer than they were demand higher levels of redistribution when informed of their true ranking. This relationship between biased perceptions and political attitudes provides an alternative explanation for the relatively low degree of redistribution observed in modern democracies.

Keywords: perceptions of income distribution, limited information, preferences for redistribution, field experiment
JEL: D31

Inequality, Entropy and Goodness of Fit

May 18, 2011
By: Frank A. Cowell (STICERD – London School of Economics)
Emmanuel Flachaire (GREQAM – Groupement de Recherche en Économie Quantitative d’Aix-Marseille – Université de la Méditerranée – Aix-Marseille II – Université Paul Cézanne – Aix-Marseille III – Ecole des Hautes Etudes en Sciences Sociales (EHESS) – CNRS : UMR6579)
Sanghamitra Bandyopadhyay (STICERD – London School of Economics)
Specific functional forms are often used in economic models of distributions; goodness-of-fit measures are used to assess whether a functional form is appropriate in the light of real-world data. Standard approaches use a distance criterion based on the EDF, an aggregation of differences in observed and theoretical cumulative frequencies. However, an economic approach to the problem should involve a measure of the information loss from using a badly-fitting model. This would involve an aggregation of, for example, individual income discrepancies between model and data. We provide an axiomatisation of an approach and applications to illustrate its importance.
Keywords: goodness of fit; discrepancy; income distribution; inequality measurement

The Decline in Inequality in Latin America: How Much, Since When and Why

May 16, 2011

By: Nora Lustig (Department of Economics, Tulane University)
Luis F. Lopez Calva (Poverty in the Latin America and the Caribbean Vicepresidency, World Bank)
Eduardo Ortiz-Juarez (RBLAC-UNDP, Mexico and World Bank)
Between 2000 and 2009, the Gini coefficient declined in 13 of 17 Latin American countries for which comparable data exist. The decline was statistically significant and robust to changes in the time interval, inequality measures and data sources. In depth country studies for Argentina, Brazil, Mexico and Peru suggest that there are two phenomena which underlie this trend: (i) a fall in the premium to skilled labor (as measured by returns to education); and (ii) higher and more progressive government transfers. The fall in the premium to skills results from a combination of supply and demand factors and, in Argentina and, to a lesser extent, in Brazil, from more active labor market policies as well.
Keywords: Income inequality, wage gap, government transfers, Latin America
JEL: O15

The consequences of early childhood growth failure over the life course

May 3, 2011
By: Hoddinott, John
Maluccio, John
Behrman, Jere R.
Martorell, Reynaldo
Melgar, Paul
Quisumbing, Agnes R.
Ramirez-Zea, Manuel
Stein, Aryeh D.
Yount, Kathryn M.
This paper examines the impact over the life course of early childhood growth failure as measured by achieved height at 36 months. It uses data collected on individuals who participated in a nutritional supplementation trial between 1969 and 1977 in rural Guatemala and who were subsequently reinterviewed between 2002 and 2004. It finds that individuals who did not suffer growth failure in the first three years of life complete more schooling, score higher on tests of cognitive skill in adulthood, have better outcomes in the marriage market, earn higher wages and are more likely to be employed in higher-paying skilled labor and white-collar jobs, are less likely to live in poor households, and, for women, fewer pregnancies and smaller risk of miscarriages and stillbirths. Growth failure has adverse impacts on body size and several dimensions of physical fitness in adulthood but does not have marked effects on risk indicators of cardiovascular and related chronic diseases. These results provide a powerful rationale for investments that reduce early-life growth failure.
Keywords: Chronic disease, early life growth failure, fertility, Human capital, Poverty, Undernutrition, Wages,