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

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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.

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  • Ed Hopkins & Tatiana Kornienko, 2008. "Which Inequality? The Inequality of Endowments Versus the Inequality of Rewards," Edinburgh School of Economics Discussion Paper Series 185, Edinburgh School of Economics, University of Edinburgh.
    • Handle: RePEc:edn:esedps:185
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    More about this item

    Keywords

    inequality; endowments; rewards; relative position; ordinal rank; games; tournaments; dispersive order; star order;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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