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Monday, December 31, 2007

"Why Do People Support Economic Systems That Seem To Be Against Their Self-Interest?"

When are people most likely to voluntarily redistribute income?:

The Thinkers: Playing fair, even when it hurts in the pocketbook, by Mark Roth, Pittsburgh Post-Gazette: ...Why do people support economic systems that seem to be against their self-interest? ... "Why do we see ... poor people ... who don't buy into an egalitarian system and ... rich people... who support it?" [Christina Fong of Carnegie Mellon University] asked. "That's a big puzzle in economics."...

"If only income mattered and beliefs about fairness didn't matter at all, then you should expect to see ... poor people demand redistribution [of tax revenue] and rich people oppose it. "The fact that we don't see that requires some explanation, and a big part of the explanation is that these beliefs about fairness matter a lot. So if you're poor but you think that the rich people really deserve to be rich, then you'll accept having less."

Much of Americans' beliefs revolve around whether they think the free-market economy is fair -- "in other words, people who work hard get more and people who don't get less" -- or whether they think it is basically unfair, so that "people are working really hard and not getting enough compensation."

In one recent study, Dr. Fong and Giacomo Corneo at the Free University of Berlin ... calculate that ... people who think the free market is unjust would give up a fifth of their income to switch from a laissez-faire economy to one where the government reduces the gap between the rich and poor. But those who feel that private enterprise is fair would give up an equal amount ... to switch from an economy where the government redistributes money to the poor, to one where the free market rules.

Other studies show that people will spend real money to ensure fairness.

In one unpublished experiment she has just finished with Felix Oberholzer at Harvard Business School, Dr. Fong gave people $10 each and said they could split it any way they wanted between themselves and public housing residents they were paired with.

But then she added a twist. All the public housing residents in the study had indicated they were held back in life either by drug abuse or by a disability, and the experimental subjects were offered the chance to spend $1 to find out which reason had been cited by the residents they were matched with.

About a third of the subjects spent the dollar, Dr. Fong said. And while you might think such curiosity would make them the less generous group, the opposite was true.

On average, she said, people who didn't seek information about their public housing residents gave them about $2 and kept about $8. Those who paid to find out about their residents gave them about $2.60 and kept the remaining $6.40.

The averages obscured a more intriguing finding, though. Those who discovered they had "worthy" residents, who said a disability had held them back, gave the residents about $4.55, and kept just $4.45 for themselves. Those who found that their residents cited drug abuse as an impediment kept $8.38 and gave the residents only 62 cents.

It turned out, then, that the people who were more generous on average also were extremely interested in finding out whether their charity recipients deserved to be helped, while those who were more selfish on average didn't care as much about how worthy the recipients were.

"Selfish people don't need the information" about recipients, she said, "because they're just not going to give [as much], but the people who want to give are only going to give if the person is deemed worthy."

While feelings about fairness influence charitable giving, another study Dr. Fong published earlier this year with Erzo Luttmer of Harvard University shows that racial and ethnic identity also plays a role in the United States.

In that study, people were shown a video about victims of Hurricane Katrina and then could decide how to split $100 between themselves and Habitat for Humanity chapters in the communities they had learned about.

Some of the videos people watched showed mostly white residents and some showed mostly black residents. ... The bottom line: Whites who said they felt "close" or "very close" to their ethnic or racial group on average gave $17 less to blacks than whites, but whites who said they were "not very close" or "not close at all" to their group gave $13 more to blacks than to whites.

The lessons from this experiment are not just about race, Dr. Fong said, but about the importance of our opinions about the people receiving any kind of assistance.

While many people still have negative attitudes toward welfare, despite the reforms made over the past decade, they generally have positive feelings toward Social Security. ...[W]ith welfare, many people feel the recipients aren't deserving, but have opposite opinions about Social Security because most recipients paid into the system when they worked.

In America, she said, one way to tap into this basic sense of fairness is to bring up the subject of the working poor.

"If they're perceived as being really hard-working and having reached that state despite their hard work, that's the point at which people are willing to step in and say either I as an individual or we as a society have to do something for this person.

"People don't necessarily think a low-income worker should be as rich as Bill Gates, even though he might be working as hard as Bill Gates, but they do have some sense of when things have gone too far."

    Posted by on Monday, December 31, 2007 at 12:24 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (18)

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