## Abstract

Society often allocates valuable resources - such as prestigious positions, salaries,

or marriage partners - via tournament-like institutions. In such situations, inequality

affects incentives to compete and hence has a direct effect on equilibrium

choices and hence material outcomes. We introduce a new distinction between

inequality in initial endowments (e.g. ability, inherited wealth) and inequality of

what one can obtain as rewards (e.g. prestigious positions, money). We show

that these two types of inequality have opposing effects on equilibrium behavior

and wellbeing. Greater inequality of rewards tends to hurt most people — both

the middle class and the poor, — who are forced into greater effort. In contrast,

greater inequality of endowments tends to benefit the middle class. Thus, which

type of inequality is considered hugely affects the correctness of our intuitions

about the implications of inequality.

or marriage partners - via tournament-like institutions. In such situations, inequality

affects incentives to compete and hence has a direct effect on equilibrium

choices and hence material outcomes. We introduce a new distinction between

inequality in initial endowments (e.g. ability, inherited wealth) and inequality of

what one can obtain as rewards (e.g. prestigious positions, money). We show

that these two types of inequality have opposing effects on equilibrium behavior

and wellbeing. Greater inequality of rewards tends to hurt most people — both

the middle class and the poor, — who are forced into greater effort. In contrast,

greater inequality of endowments tends to benefit the middle class. Thus, which

type of inequality is considered hugely affects the correctness of our intuitions

about the implications of inequality.

Original language | English |
---|---|

Publisher | Edinburgh School of Economics Discussion Paper Series |

Number of pages | 39 |

Publication status | Published - Mar 2008 |

### Publication series

Name | ESE Discussion Papers |
---|---|

No. | 185 |

## Keywords

- inequality
- endowments
- rewards
- relative position
- ordinal rank
- games
- tournaments
- dispersive order
- star order
- C72
- D63
- D62
- D31