Wednesday, January 13, 2010

Interfluidity post on inequality

Steve Waldman on, linked to at, has referenced some of my reference rants on inequality in a nice list of references on inequality.  Before starting The Animal Spirits Page I contributed frequently to  Today I was happy to thank Steve.

Benign writes:


We discussed this back in June 2008 (oh so long ago!) on Interfluidity, and at the time I did a Google search on inequality and productivity and came up with this:

Richard B. Freeman, Alexander M. Gelber

NBER Working Paper No. 12588

Issued in October 2006

NBER Program(s): LS POL

—- Abstract —–

This paper examines performance in a tournament setting with different levels of inequality in rewards and different provision of information about individual's skill at the task prior to the tournament. We find that that total tournament output depends on inequality according to an inverse U shaped function: We reward subjects based on the number of mazes they can solve, and the number of solved mazes is lowest when payments are independent of the participants' performance; rises to a maximum at a medium level of inequality; then falls at the highest level of inequality. These results are strongest when participants know the number of mazes they solved relative to others in a pre-tournament round and thus can judge their likely success in the tournament. Finally, we find that cheating/fudging on the experiment responds to the level of inequality and information about relative positions. Our results support a model of optimal allocation of prizes in tournaments that postulate convex cost of effort functions.

This seems plausible to me. The question for Americans going forward is whether we descend into neo-feudalism–which implies long-term economic decline if the above is true–or whether our income and wealth distributions can be returned to something that most Americans find to be fair. Simon Johnson is correct in saying that the country is currently being run like a banana republic ("with nukes"). But the inequality has been long in the making and extends across virtually all occupations.

Most Americans today believe in some way or another that the social contract is broken. The most compelling historical theory of this that I've found is Strauss and Howe's The Fourth Turning, which suggests that we're heading into a crisis over the next decade or more that will require a rewrite of the American social contract. It's going to be interesting.


January 13th, 2010 at 2:47 pm

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