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.
|Date of creation:||Dec 1996|
|Publication status:||published as Journal of Labor Economics, Vol. 15, no. 2 (April 1997): 189-196.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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, Volume 5, Economic Growth, pages 1-80 National Bureau of Economic Research, Inc.
- William D. Nordhaus & James Tobin, 1971. "Is Growth Obsolete?," Cowles Foundation Discussion Papers 319, Cowles Foundation for Research in Economics, Yale University.
- 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, vol. 88(6), pages 1226-1230, December.
- Freeman, Scott, 1996. "Equilibrium Income Inequality among Identical Agents," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 1047-1064, October.
- Marshall, John M, 1984. "Gambles and the Shadow Price of Death," American Economic Review, American Economic Association, vol. 74(1), pages 73-86, March.
- Ng Yew Kwang, 1965. "Why do People Buy Lottery Tickets? Choices Involving Risk and the Indivisibility of Expenditure," Journal of Political Economy, University of Chicago Press, vol. 73, pages 530-530.
- Milton Friedman, 1953. "Choice, Chance, and the Personal Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 61, pages 277-277.
- Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb.. Full references (including those not matched with items on IDEAS)