Fairness, Incentives, and Salience in the Demand for Redistribution

1
Fairness, Incentives, and Salience in the Demand
for Redistribution

• Christina Fong
• Department of Social and Decision Sciences

2
Alexis de Tocqueville Democracy in America
(1835), Book II, chapter VII
The Americans...are fond of explaining almost all
the actions of their lives by the principle of
self interest rightly understood they show with
complacency how an enlightened regard for
themselves constantly prompts them to assist one
another and inclines them willingly to sacrifice
a portion of their time and property to the
welfare of the state. In this respect I think
they frequently fail to do themselves justice in
the United States as well as elsewhere people are
sometimes seen to give way to those disinterested
and spontaneous impulses that are natural to man
but the Americans seldom admit that they yield to
emotions of this kind they are more anxious to
do honor to their philosophy than to
themselves.  
3
Todays Agenda

• Overview research on behavioral motives for
  public redistribution.
• Research is located at intersection of several
  enormous literatures on causes and consequences
  of social policy
• Political history
• Public economics
• Public opinion, political psychology, behavioral
  economics

4
Motivation Step Toward a Larger Goal

• Explain dramatic differences in the quantities of
  transfers across redistributive situations.
• In 1995 Sweden spent 33 of GDP on social
  expenditures. U.S spent under 16 .
• Foreign aid expenditures roughly 10x greater in
  Northern Europe than in U.S.
• Dramatic and uneven growth of OECD public sectors
  since WWII.
• Sweden General outlays 31 of GDP in 1960, 64.5
  in 1985
• US General outlays 27 of GDP in 1960, 36.7 in
  1985.
• 24 support spending on welfare, 64 support
  assistance for the poor.
• Charitable donations raised after Sept. 11.

5
Two Main Questions

• Why and to what extent do people care about
  others in various settings?
• Why and to what extent do people place the
  responsibility of social welfare in the hands of
  the public sector (governments) rather than the
  private sector (markets, communities, families)

6
Traditional Econ View 1

• Selfish median voter
• Median Y less than mean
• Even if not, risk aversion creates insurance
  motives
• Abundant, striking evidence against pure
  self-interest
• Consequence much effort on the wrong questions

7
Traditional Econ View 2

• Simple altruism and variants
• A positive weight is placed on recipients
  utility from consumption, or utility from ones
  own gift or transfer.
• Open question to what extent does behavioral
  evidence contradict this?
• Generosity may depend on perceptions of the poor,
  group membership, social distance
• Generosity may vary across situations, cultures,
  time
• If generosity is conditional and situation
  variant, traditional theories lose their power
  unless we can find simple, empirically
  historically disciplined assumptions about
• Behavior
• Institutional environment

8
Method

• Establish a set of empirical regularities using
  sensitivity analysis on different types of data
• Begin with traditional model
• U¹(1-a)u(c2)au(c2)
• Traditional assumption is that transfers made
  only from rich to poor, so this is a form of
  inequality aversion
• U¹ u(cr)-au(cr)-u(cp)
• Attempt to incorporate reasonable behavioral
  assumptions into this framework
• Formulation of a.
• Attention to beliefs, preferences, incentives,
  and constraints.
• Take history into account when deciding which
  variables to endogenize

9
Published Behavioral Effects

• Americans support less redistribution if they
  think poor are lazy rather than industrious but
  unlucky (Kluegel and Smith 1986)
• Socioeconomic characteristics have surprisingly
  small effects compared to lazy poor effects and
  lazy poor effect is not spurious (Fong 2001).
• Effect is widespread, occurs in several European
  countries and in different contexts (Bowles,
  Fong, Gintis Forthcoming).
• Americans exhibit racial group loyalty in their
  attitudes to redistribution (Luttmer 2001)
• Americans exhibit negative exposure effects if
  exposed to recipients with undesirable traits
  (Luttmer 2001)

10
Lazy poor effects are enormous
11
Recent Findings

• Substantial amount of generosity that is not
  conditioned on beliefs about causes of income,
  group membership, or social proximity.
• Substantial and VERY robust correlation between
  domestic and foreign public generosity
• In country-level expenditures
• In individual-level attitudinal support
• Individual sense of moral duty to help poor
  countries predicts country level expenditures on
  domestic and foreign transfers
• Consistent with research on cultural traits
  (Hofstede 2001)

12
Country-level Expenditure Data
13
Individual-level Attitudinal Data
14
Substitution between public and private giving?

• Incentive for public giving If transfers are
  private, people may free-ride on each other's
  altruism. Under-provision of transfers.
• Incentive for private giving Taxes and public
  transfers involve incentive costs
• Survey results People who have given to charity
  want more public redistribution but are more
  likely to live in countries that in fact spend
  less.
• More work on this in progress with Jörgen Weibull

15
Merged Expenditure and Attitudinal Data
16
Possible Modeling Approach

• af(C, A(êj),G( ?i- ?jêi- êj)).
• ?a/?C0, ?a/?A0, ?a/?G
• Can impose a shape consistent with idea that
  decision rules may change suddenly with the
  context (Loewenstein 2001)
• a might be sigmoid shaped function of the
  arguments

17
Issues!

• Where do beliefs about effort come from?
• Are characteristics/work activities of the poor
  endogenous?
• When does group psychology take effect?
• Are lazy poor effects as universal as they
  seem?
• Surprising result NO lazy poor effect in some
  countries!
• It is still not completely clear how to interpret
  the effect.
• Is it a question of salience?

18
Salience (What Follows is Work in Progress!)

• Assumption A individuals attention is focused
  on a variable and the variable becomes salient
  when that person perceives a consequence to
  different values that the variable may take.

19
Stylized Fact

• Countries in which social expenditures are either
  in large part work promoting or in small part
  means tested have smaller lazy poor effects.

20
OECD Social Expenditures Data

• Old age pensions
• Disability pensions
• Occupational Injury and Disease
• Sickness Benefits
• Services for the Elderly and Disabled People
• Survivors
• Family cash benefits
• Family services
• Active labor market programs
• Unemployment
• Health
• Housing
• Other contingencies

21
Interaction Effect

• In Eurobarometer data, effect of belief that
  poverty is caused by laziness on opposition to
  redistribution decreases as social policy of a
  nation becomes more work promoting or less means
  tested.
• Data are severely limited
• What can theory say?

22
Optimal Redistribution with Endog. Search Effort
and Exog. Work Requirements

• People may either work and earn income in private
  sector or take government transfer and meet
  certain work obligations of the social policy.
• Probability of not getting private sector job
  depends on luck and effort.
• Rich care about the poor

23
Two Steps

• Individuals choose job search effort given the
  tax/transfer rate and exogenously enforceable
  effort levels in social program and exogenous
  work norms in private sector alternative
• Taking the optimal effort function into account,
  individuals choose their preferred level of
  redistribution

24
Result

• Optimal redistribution increases in exogenously
  enforced effort.
• The effect of effort expended on optimal
  redistribution decreases as the exogenously
  enforceable effort increases.

25
Interpretation

• Incentive problems can focus attention on the
  disutility of effort and the labor market
  activities of the poor and make this a salient
  issue in redistributive politics.

26
Whats Next?

• Now that I know what to look for, I will
• Try to refine my characterization of welfare
  states according to the incentives they provide.
• Test for interactions between subjective concerns
  about incentives and lazy poor effects.
• I will then pull incentives, salience, and
  fairness together into one model.

27
Summary

• In economics, trusted empirical regularities are
  often a constraining factor.
• Most of the progress in my research area has been
  empirical. Four important effects
• Lazy poor effects
• Unconditional generosity
• Racial group loyalty
• Social distance/proximity

28
Summary, Cont

• However, I have found that these effects are not
  universal.
• Under what conditions might the variables be
  salient and have effects on redistributive
  demands?
• I model incentive costs as the main consequence
  of laziness that tax payers may focus on in
  their decision over their optimal redistribution.
• This application area illustrates important
  functions of theory to illuminate the variables
  and how they matter, and guide empirical
  investigation.