Which Inequality? The Inequality of Endowments Versus the Inequality of Rewards

Research output: Working paperDiscussion paper

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.
Original languageEnglish
PublisherEdinburgh School of Economics Discussion Paper Series
Number of pages39
Publication statusPublished - Mar 2008

Publication series

NameESE Discussion Papers
No.185

Keywords

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

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