Unequally-distributed resources, whether people’s income or competence, are ubiquitous in our real world. Whether to promote competition or to lead to a more equal environment is often in question in societies or organizations. With heterogeneous endowments, we let subjects collectively choose whether to have a competitive lottery contest – where only one individual in a group wins and receives an award, generating a greater income inequality – or to have a public good that benefits the less-endowed to a greater degree. Our data indicates that highly-endowed individuals contribute little when the public good is selected. The majority of subjects, however, vote in favor of having a public good, contrary to the standard theory predictions. In addition, a belief elicitation task shows that they expect payoffs to be more equally distributed under the public good regime than under the contest regime. Moreover, the subjects’ preferences between the two regimes are little affected by their risk attitudes or the size of awards in competition. These suggest that people’s institutional choices are driven more by their income inequality-averse preferences.
|Keywords:||heterogeneity, experiment, cooperation, competition, public goods, inequality|
|JEL:||C92 D63 D70 D72 H4|
|By:||Sean P. Hargreaves Heap (University of East Anglia)
Abhijit Ramalingam (University of East Anglia)
Siddharth Ramalingam (Cambridge Associates)
Brock V. Stoddard (Indiana University)
At least since Adam Smith, economists have recognized the beneficial effects of competition in markets. The possible positive influence of competition between teams on the free rider problem within teams is a more recent discovery. It is important because the free rider problem exists to some degree in most teams and because many outcomes in economic and social life depend on competition between teams. However, teams are rarely endowed equally and we do not know much about how such inequality affects the influence of competition on free riding. We address this question with an experiment. It is important not only because of the connections sketched above, but also because this is an overlooked aspect of how inequality impacts on society. We find that there is less free riding within teams when there is competition, that this is robust to moderate degrees of inequality but disappears when inequality is high.
Cappelen, Alexander W., James Konow, Erik Ø. Sørensen, and Bertil Tungodden. 2013. “Just Luck: An Experimental Study of Risk-Taking and Fairness." American Economic Review, 103(4): 1398-1413. DOI: 10.1257/aer.103.4.1398; Online Appendix (307.82 KB) | Download Data Set (215.97 KB)