Too Much Redistribution, Too Little or Just Right?

Abstract

How informed are individuals about the income distribution in their own country? This article presents survey data showing that Norwegians tend to overestimate the level of inequality in Norway. This contrasts with survey data from the United States (US), presented in Norton and Ariely , showing that Americans vastly underestimate inequality in their own country. These findings are interpreted by emphasizing the effect existing differences in income have on peoples’ psychological capacity to observe income differences. Norwegians are also asked how they ideally would like income to be distributed. They construct an ideal income distribution that is surprisingly close to the actual (egalitarian) distribution in Norway. Americans also construct an ideal distribution that more closely resembles the distribution of income in Norway than in the US. Respondents’ preferences for small income differences are discussed with reference to recent findings in experimental and neurobiological research.

Keywords:

• Inequality
• income
• preferences for redistribution

JEL classification:

• D31
• D63
• J31

Acknowledgments

I thank Gunnar Eskeland, James Godbolt, Karl Kerner, Cathrine Seierstad and seminar participants at USN School of Business for helpful comments. I also thank Trine Arna Gabrielsen, Maria Louisa Manuela Schock and Jakob Longva Reiersen for valuable help with collection and preparation of data.

Notes

1 The Scandinavian countries have long ‘competed’ in having the lowest levels of income inequality among OECD countries. Other countries with low inequality in the OECD area are Slovenia, the Czech Republic and the Slovak Republic.

2 However, if we look at the richest 59 respondents, those with an income over NOK 800,000 (approximately EUR 80,700), we see that they want a slightly more unequal distribution than the one that exists in Norway. They want the richest 20% to have 39.4% of the total income (while they actually have 35.0%), leaving the three lowest-earning groups with somewhat less than what they have.

3 Tocqueville summed up and interpreted his observations in his two-volume work Democracy in America, published in 1835 and 1840.

4 See also Alesina and Glaeser (200445) for a related discussion, although they emphasize more how diverse historical experiences lead to country (or regional) specific norms about what is acceptable or not in terms of inequality.

5 See Alesina and Giuliano (2011), Corneo and Grüner (2002) and Fong (200145) for additional evidence.

6 There is one caveat, though. As noted in Section 2, people tend to place themselves closer to the middle of the income distribution. Therefore, there may be individuals at the top of the income distribution that support redistribution because they mistakenly believe that they will benefit from it. I thank an anonymous referee for pointing this out.

7 People seem to perceive income differences that are due to luck as particularly illegitimate, while income differences that are due to effort are more accepted (Alesina & Giuliano, 2011; Cappelen et al., 2007).