Recently experimental economists have provided evidence that systematically refutes the self-interest hypothesis (Fehr and Schmidt, 2003). It suggests that individuals are strongly motivated by social preferences, concerns for fairness and reciprocity. Based in these foundations, there is an agreement in the empirical literature that individual's well-being depends on others individual's income or the income inequality (defined as any disparities in income between individuals (Clark & D'Ambrosio,2014)). Both ideas are related with the presence of social preferences and with different micro foundations of economic behavior (altruism, envy, pride, fairness,positionality, etc.). There is a wide variety of theoretical interpretations of these results, which seek to explain why people concern about the income of others or the income distribution.
In order to explain the reasons why people might be affected by income inequality, in this paper we focus on a particular notion of social preferences: inequality aversion. An overview of the different economic models available and recent empirical findings on this topic, suggest an overlapping of different strands of the literature about the notion of inequality aversion (Clark & D´Ambrosio; 2014). As a result, there are different approaches and alternative methods to measure inequality aversion, which makes it more difficult to reach an agreement on the relevance of inequality aversion and to understand why individuals care about the distributionof income in a society. Clark & D'Ambrosio distinguish between two broad groups of models to explain individual inequality attitudes: the Comparative approach and the Normative approach. While in the former, attitudes towards inequality depend on one’s ownposition relative to others in the income distribution, in the normative approach the individual's attitudes towards inequality are irrespective of where she appears in the distribution. Even in this second case, an individual might care about income inequality although she does not participate in this society.
These two broad notions of attitudes toward inequality lead to two types of measures of inequality aversion: self-centred inequality aversion (Fehr and Schmidt, 1999), and not self-centred inequality aversion (Carlsson et al 2003; 2005).
The aim of this paper is to estimate aversion to inequality, differentiating between self-centred inequality aversion and not self-centred inequality aversion. This objective allows us to obtain an unbiased measure of not self-centred inequality aversion. Furthermore, we provide evidence whether each notion of inequality are relevant for individuals.
We use an experimental survey design, which is an adaptation of Amiel& Cowell (1992). A sample of students from Universidad de la Republica (UDELAR) in Uruguay, will take part in the main experiment. Participation is voluntary and there was no show-up fee paid. Participants are asked to choose for several pairs of societies which one they would prefer for their grandchildren to live. The difference with previous papers is that in this experiment, the same individual is asked to choose when his grandchildren is at the median, the maximum and the minimum of the income distribution.Questionnaires also contained several questions regarding participant’s opinions, attitudes and preferences. This information, together with socioeconomic background of students provided by University, will be used to investigate which mechanisms explain aversion to inequality.
This paper contributes evidence about importance of distinguishing between both notions of inequality aversion (self centered vs not self centered inequality aversion). Also, suggests a methodological approach to measure not self-centered inequalityaversion unbiased. We include a set of test to understand why people care about these two notions of income inequality. Finally, there are no previous measures of inequality aversion for Uruguay, and even, there is little evidence about this topic for developing countries.
The distinction between self-centred and not self-centred inequality aversion helps us to better understand people behavior and social preferences. Furthermore, this distinction is relevant, because both types of inequality aversion generates very different incentives, which could affect optimal tax rates (Aronsson and Johansson-Stenman 2016).