Does increasing inequality threaten social stability? Evidence from the lab

We investigate the impact of rising inequality on social instability through a novel multi-period laboratory experiment. In each period, members of two groups are randomly matched to play a battle of the sexes game, in which payoffs are either zero for both or positive but unequal. At the beginning of the game, the implied payoff inequality is low but, under some treatments, it increases over time. While under low initial inequality, unequal conventions – where one group is systematically better off – tend to emerge, increasing inequality causes destabilization. This is initiated by the group disadvantaged by the unequal convention and is particularly pronounced when not only the relative, but also the absolute position of the disadvantaged group is worsening. These findings are consistent with a simple model incorporating disadvantageous inequality aversion. Finally, we show that history matters; responses to current inequality depend on past experiences of inequality and stability.