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The Incentive Effects of Inequality: An Experimental Investigation

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  • Hyejin Ku
  • Timothy C. Salmon

Abstract

The effect of inequality on economic growth and efficiency is often debated. Our study investigates a behavioral phenomenon through which inequality might have adverse effects on economic growth. In particular we investigate whether or not individuals exhibit a discouragement effect in the face of inequality that leads to lower work effort. If such an effect exists, it provides a mechanism for converting even idiosyncratic inequality into sustained inequality with adverse consequences for the individuals being affected by the inequality and the economy as a whole. We investigate this phenomenon using an economic experiment to allow us to cleanly vary the nature of inequality and to allow us to directly observe several characteristics of the workers. We find robust support for the existence of a discouragement effect lending credibility to the claims that such an effect would exist in external situations among workers confronted with disadvantageous inequality.

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  • Hyejin Ku & Timothy C. Salmon, 2012. "The Incentive Effects of Inequality: An Experimental Investigation," Southern Economic Journal, John Wiley & Sons, vol. 79(1), pages 46-70, July.
    • Handle: RePEc:wly:soecon:v:79:y:2012:i:1:p:46-70
    DOI: 10.4284/0038-4038-79.1.46
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    2. Subhasish M. Chowdhury & Anastasia Danilov & Martin G. Kocher, 2023. "The Lifecycle of Affirmative Action Policies and Its Effect on Effort and Sabotage Behavior," Rationality and Competition Discussion Paper Series 401, CRC TRR 190 Rationality and Competition.
    3. Guangsu Zhou & Lizhong Liu & Yang Song, 2022. "Inequality of opportunity and mass incidents: Evidence from China," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 30(3), pages 465-488, July.
    4. Robert Hannan & Niamh Lafferty & Patricia Mannix McNamara, 2023. "Leadership Opportunities in the School Setting: A Scoping Study on Staff Perceptions," Societies, MDPI, vol. 13(5), pages 1-18, May.
    5. Fongoni, Marco, 2024. "Does pay inequality affect worker effort? An assessment of experimental designs and evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 220(C), pages 697-716.
    6. E. Wesley F. Peterson, 2017. "Is Economic Inequality Really a Problem? A Review of the Arguments," Social Sciences, MDPI, vol. 6(4), pages 1-25, December.

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