Experiments on Inequality: Measuring Inequity Aversion and its Impact on Well-being



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Inequality has been the focus of numerous studies in Economics and the subject of ongoing debate in the profession. However, natural environments often suffer from confounding effects and the mere difficulty of measuring wealth accurately. Thus, laboratory experiments constitute a valuable tool to examine effects difficult to study otherwise. This dissertation focuses on measuring the negative effect of inequality on individuals' well-being in the laboratory. Chapter 1, proposes a novel methodology called the inequity aversion list to estimate the parameters of Fehr and Schmidt's (1999) model of inequity aversion. Previous elicitation methodologies often use standard games, like ultimatum and dictator, which results in an incongruity between estimates at the aggregate and individual levels. The explanation I offer for this discrepancy is that reciprocity and inequity aversion are confounded when analyzing other-regarding behavior in standard games, biasing the estimates. The inequity aversion list improves over previous methodologies by isolating the effect of inequity aversion from other motives. I take the inequity aversion list to the laboratory and find that subjects largely display the predictions of Fehr and Schmidt's model and behave according to the model's assumptions. In chapter 2, I use the inequity aversion list to test various behavioral models beyond Fehr & Schmidt's (1999) inequity aversion. Using the data from the experiment explained in the first chapter, I identify the patterns of behavior individuals may display when answering the inequity aversion list. Each of these patterns is associated with a behavioral model. Using a scoring procedure, I determine which behavioral model fits each individual's data best. Chapter 3, presents the results from an online experiment absent choice in measuring subjective well-being (SWB) before and after an exogenous shock that reveals to subjects how many experimental points they and another subject receive, and whether or not points are worth money. The result is that subjects are made significantly happier when they receive monetized rather than non-monetized points, suggesting money is valued more than the points it represents. In contrast, subjects are made equally unhappy when they receive fewer monetized points as when they receive fewer non-monetized points than others, suggesting relative money is not valued more than the relative points it represents.