Subjective Inequity Aversion: How Unfair Inequality Affects Subjective Well-Being

This paper argues that subjective perceptions of inequity (i.e. unfairness), rather than objective deviations from equality, are key to understanding reactions to (in)equality. Combining theoretical insights from social justice literature and social comparison, this paper formalizes this idea by adapting the Fehr and Schmidt (1999) model of inequity aversion. To test this model, we analyze the association between respondents’ perceived fairness of own, top, and bottom incomes with subjective well-being using data from the European Social Survey 2018. Results from spline regressions indicate that perceived injustice of own and top incomes is negatively related to subjective well-being even when controlling for people’s relative income position or objective levels of macro level inequality. For perceived unfairness of bottom incomes, we find no substantive relationships with subjective well-being. Results are consistent across several robustness checks and when using German panel data to test the effect of own income fairness on subjective well-being in a longitudinal setting. Findings imply that combining theoretical insights emphasizing normative and comparative social mechanisms is crucial to explaining the inequity well-being relationship.