Does increasing inequality threaten social stability? Evidence from the lab

In this paper we study the relationship between inequality and social instability. While the argument that inequality can be damaging for the cohesion of a society is old, the empirical evidence is mixed. We use a novel approach to isolate the causal relationship running from inequality to instability. Specifically, we conduct a laboratory experiment. In the experiment, two groups are interacting with each other repeatedly and have an incentive to cooperate even though cooperation comes at the cost of inter-group inequality. In the second half of the experiment, we vary the extent of the inequality implied by cooperation. Our results show that increasing such inequality has a destabilising effect; the disadvantaged group attacks the status quo. We show that this behaviour is consistent with a simple theoretical framework incorporating disadvantageous inequality aversion and myopic best response. Moreover, we find that a worsening of the absolute situation of the disadvantaged group or a sudden rather than gradual increase in inequality exacerbates the destabilising effect of inequality. Finally, we show that history matters, with people responding differently to the same level of inequality now depending on their past experiences.