Inequality and Market (In)efficiency

Despite generally high rates of inequality, individuals have a tendency to underestimate the level of wealth inequality in their nation (Norton and Ariely, 2011). These inaccurate perceptions consequently inform individuals’ opinions for redistribution policies. Recent research demonstrates that perceived inequality is a better predictor of policy preferences than actual inequality (Engelhardt and Wagener, 2014). There is therefore growing support for greater transparency of inequality. In two studies we demonstrate the effects of inequality transparency on the behavior of individuals with relatively high wealth, revealing potential unintended consequences of increased inequality transparency. Study 1 demonstrates the market-level effects of inequality transparency. Participants (N= 1001) first completed a series of counting tasks to earn points. Participants thought their points were awarded based on performance, but in actuality, participants were randomly assigned to one of five conditions [22, 49, 72, 105, or 304 points], which represent the true income distribution of the United States. They were then told they could use the points to bid against four other participants for the chance to win YouTube videos. If they did not win any videos they would have to complete five more minutes of counting tasks. Any points they did not bid were converted into a monetary bonus. Half of the participants received information depicting how their score compared to the other participants in their auction group, while the other half were given no information other than their own earnings (Transparency vs No Transparency).