An adverse social welfare consequence of a rich-to-poor income transfer: A relative deprivation approach

A transfer from a richer individual to a poorer one seems to be the most intuitive and straightforward way of reducing income inequality in a society. However, can such a transfer reduce the welfare of the society? We show that a rich-to-poor transfer can induce a response in the individuals’ behaviors which actually exacerbates, rather than reduces, income inequality as measured by the Gini index. We use this result as an input in assessing the social welfare consequence of the transfer. Measuring social welfare by Sen’s social welfare function, we show that the transfer reduces social welfare. These two results are possible even for individuals whose utility functions are relatively simple (namely, at most quadratic in all terms) and incorporate a distaste for low relative income. We first present the two results for a population of two individuals. We subsequently provide several generalizations. We show that our argument holds for a population of any size, and that the choice of utility functions which trigger this response is not singular - the results obtain for an open set of the space of admissible utility functions. In addition, we show that a rich-to-poor transfer can exacerbate inequality when we employ Lorenz-domination, and that it can decrease social welfare when we draw on any increasing, Schur-concave welfare function

Happy hosts? International tourist arrivals and residents' subjective well-being in Europe

While there has been a growing interest in the relationship between perceived tourism impacts and residents’ quality of life, little is known about how residents’ well-being is affected by actual tourist arrivals. This paper studies the effect of international tourist arrivals on the subjective well-being – happiness and life satisfaction – of residents in European countries. Data come from the six waves of the European Social Survey, conducted in 32 countries in 2002-2013. The results of the OLS fixed-effects and instrumental-variable estimations suggest that tourist arrivals reduce residents’ life satisfaction. This negative relationship tends to be more pronounced in countries where tourism intensity is relatively high, as well as among people living in rural areas. In addition, tourist arrivals have a greater negative relationship with the evaluative component of subjective well-being (life satisfaction) than its affective component (happiness)

Nominal or Real? The Impact of Regional Price Levels on Satisfaction with Life

According to economic theory, real income, i.e., nominal income adjusted for purchasing power, should be the relevant source of life satisfaction. Previous work, however, has only studied the impact of inflation adjusted nominal income and not taken into account regional differences in purchasing power. Therefore, we use a novel data set to study how regional price levels affect satisfaction with life. The data set comprises about 7 million data points that are used to construct a price level for each of the 428 administrative districts in Germany. We estimate pooled OLS and ordered probit models that include a comprehensive set of individual level, time-varying and time-invariant control variables as well as control variables that capture district heterogeneity other than the price level. Our results show that higher price levels significantly reduce life satisfaction. Furthermore, we find that a higher price level tends to induce a larger loss in life satisfaction than a corresponding decrease in nominal income. A formal test of neutrality of money, however, does not reject neutrality of money. Our results provide an argument in favor of regional indexation of government transfer payments such as social welfare benefits

Is a Minimum Wage an Appropriate Instrument for Redistribution?

We analyse the redistributional (dis)advantages of a minimum wage over income taxation in competitive labour markets without imposing assumptions on the (in)efficiency of labour rationing. Compared to a distributionally equivalent tax change, a minimum-wage increase raises involuntary unemployment, but also raises skill formation as some individuals avoid unemployment. A minimum wage is an appropriate instrument for redistribution if and only if the public revenue gains from additional skill formation outweigh both the public revenue losses from additional unemployment and the utility losses of inefficient labour rationing. We show that this critically depends on how labour rationing is distributed among workers. A necessary condition for the desirability of a minimum-wage increase is that the public revenue gains from higher skill formation outweigh the revenue losses from higher unemployment. We write this condition in terms of measurable sufficient statistics

Who Needs Good Neighbours?

Abstract: Due to the increasing spatial dispersion of social networks, the association between neighbor relationships and quality of life has become more uncertain. Our analysis used instrumental variable modelling to reduce bias associated with residual confounding and reverse causation, in order to provide a more reliable examination of the effect of interaction with neighbors on subjective well-being than previous work. While the frames of reference for individuals’ socializing may have shifted outside the neighborhood, our analysis provides robust evidence that interaction with neighbors still matters a great deal for subjective well-being. A further important question to ask is if neighboring does affect well-being, then are there certain groups in society for whom contact with neighbors matters more? Our analysis suggests that there are, namely for those in a relationship, unemployed or retired. This means that while fostering contact with neighbors has the potential to significantly improve individual well-being, such policy efforts are likely to matter a good deal more in neighborhoods with relatively large numbers of geographically constrained social groups, such as the elderly and the unemployed. Key words: subjective well-being, neighborly interaction, social capita

Can a concern for status reconcile diverse social welfare programs?

Let there be two individuals: “rich,” and “poor.” Due to inefficiency of the income redistribution policy, if a social planner were to tax the rich in order to transfer to the poor, only a fraction of the taxed income would be given to the poor. Under such inefficiency and a standard utility specification, a Rawlsian social planner who seeks to maximize the utility of the worst-off individual will select a different allocation of incomes than a utilitarian social planner who seeks to maximize the sum of the individuals’ utilities. However, when individuals prefer not only to have more income but also not to have low status conceptualized as low relative income, and when this distaste is incorporated in the individuals’ utility functions with a weight that is greater than a specified critical level, then a utilitarian social planner will select the very same income distribution as a Rawlsian social planner

So Far So Good: Age, Happiness, and Relative Income

In a simple 2-period model of relative income under uncertainty, higher comparison income for the younger cohort can signal higher or lower expected lifetime relative income, and hence either increase or decrease well-being. With data from the German Socio-Economic Panel and the British Household Panel Survey, we first confirm the standard negative effects of comparison income on life satisfaction with all age groups, and many controls. However when we split the West German sample by age we find a positive significant effect of comparison income in the under 45s, and the usual negative effect only in the over 45 group. With the same split in UK and East German data, comparison income loses significance, which is consistent with the model prediction for the younger group. Our results provide first evidence that the standard aggregation with only a quadratic control for age can obscure major differences in the effects of relative income

Subjective Well-being in Rural India: The Curse of Conspicuous Consumption

Using data on 697 individuals from 375 rural low income households in India, we test expectations on the effects of relative income and conspicuous consumption on subjective well-being. The results of the multi-level regression analyses show that individuals who spent more on conspicuous consumption report lower levels of subjective well-being. Surprisingly an individual’s relative income position does not affect feelings of well-being. Motivated by positional concerns, people do not passively accept their relative rank but instead consume conspicuous goods to keep up with the Joneses. Conspicuous consumption always comes at the account of the consumption of basic needs. Our analyses point at a positional treadmill effect of the consumption of status goods

The impact of government policies on income inequality and the translation of growth into income poverty reduction: protocol for two systematic reviews

The eradication of poverty has been a central aim of international development for several decades, and the importance of reducing inequality is also increasingly accepted. This paper presents the protocols for two systematic reviews on the government policies and interventions that affect in-country income inequality and the translation of economic growth into reductions in income poverty. The paper describes the background to the reviews and the links between them, their aims and scope, the inclusion criteria, search strategy and synthesis options