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Manufactured Inequality

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  • Sherwin Rosen

Abstract

Many discrete life choices--where to live, what kind of job to hold, and consumption lifestyle--are stratified by income. Stratification and sorting often manifest state-dependent preferences in which the marginal utility of income (consumption) depends on the outcome of prior choices. For example, one can choose to live a quiet life in the country, where money buys few things, or can choose a more active and exciting lifestyle in a large city, where money has greater value because all kinds of goods are available to buy. The natural market equilibrium stratification is for rich people to live in the city, where their money has more value, and for poor people to live in the country, where money is less productive. But before location is chosen, the a priori von Neuman-Morgenstern utility function over both choices can take the Friedman-Savage form, providing pareto efficient social demands for inequality. If there is not enough inequality to produce the socially optimum stratification to begin with, inequality is socially manufactured. People voluntarily participate in gambles and lotteries in which the winners are rich and live in the exciting places and the losers are poor and choose the quiet life. There is a inequality.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5846.

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Date of creation: Dec 1996
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Publication status: published as Journal of Labor Economics, Vol. 15, no. 2 (April 1997): 189-196.
Handle: RePEc:nbr:nberwo:5846

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  1. Gregory, Nathaniel, 1980. "Relative Wealth and Risk Taking: A Short Note on the Friedman-Savage Utility Function," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(6), pages 1226-30, December.
  2. Freeman, Scott, 1996. "Equilibrium Income Inequality among Identical Agents," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 104(5), pages 1047-64, October.
  3. Marshall, John M, 1984. "Gambles and the Shadow Price of Death," American Economic Review, American Economic Association, American Economic Association, vol. 74(1), pages 73-86, March.
  4. William D. Nordhaus & James Tobin, 1973. "Is Growth Obsolete?," NBER Chapters, in: The Measurement of Economic and Social Performance, pages 509-564 National Bureau of Economic Research, Inc.
    • William D. Nordhaus & James Tobin, 1972. "Is Growth Obsolete?," NBER Chapters, in: Economic Research: Retrospect and Prospect Vol 5: Economic Growth, pages 1-80 National Bureau of Economic Research, Inc.
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Cited by:
  1. Gruner, Hans Peter, 2003. "Redistribution as a selection device," Journal of Economic Theory, Elsevier, Elsevier, vol. 108(2), pages 194-216, February.
  2. Robert F. Martin, 2003. "Consumption, durable goods, and transaction costs," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 756, Board of Governors of the Federal Reserve System (U.S.).
  3. Dahan, Momi & Gaviria, Alejandro, 2003. "Parental actions and sibling inequality," Journal of Development Economics, Elsevier, Elsevier, vol. 72(1), pages 281-297, October.
  4. Kang, Byung-Goo & Yun, Myeong-Su, 2008. "Changes in Korean Wage Inequality, 1980−2005," IZA Discussion Papers 3780, Institute for the Study of Labor (IZA).
  5. G. S Becker & K. M Murphy & Ivan Werning, 2000. "Status, Lotteries, and Inequality," University of Chicago - George G. Stigler Center for Study of Economy and State, Chicago - Center for Study of Economy and State 160, Chicago - Center for Study of Economy and State.
  6. Kiminori Matsuyama, 2005. "Emergent Class Structure," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1407, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Michael A. Sadler, 2000. "Escaping Poverty: Risk-Taking and Endogenous Inequality in a Model of Equilibrium Growth," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(4), pages 704-725, October.
  8. Horowitz, Andrew W. & Wang, Jian, 2004. "Favorite son? Specialized child laborers and students in poor LDC households," Journal of Development Economics, Elsevier, Elsevier, vol. 73(2), pages 631-642, April.
  9. Perez Truglia, Ricardo Nicolas, 2007. "Conspicuous consumption in the land of Prince Charming," MPRA Paper 22009, University Library of Munich, Germany, revised 22 Mar 2010.
  10. Derek Neal & Sherwin Rosen, 1998. "Theories of the Distribution of Labor Earnings," NBER Working Papers 6378, National Bureau of Economic Research, Inc.

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