The income inequality trap: When redistributive preferences do not correct greater inequality

Abstract

In a lab study, we examine how preferences for redistribution are affected by income inequality, uncertainty of income class, income mobility, and the source of income (random or effort based). Under income class uncertainty we discover an inequality trap where individuals exposed to a more unequal pre-tax distribution also demonstrate greater acceptance of post-tax inequality. This effect is particularly pronounced in the effort condition and with low mobility. However, as individuals become aware of their true economic positions, the conflict between the poor and the rich intensifies, decreasing tolerance for inequality. These findings indicate that traditional rational-expectations models which solely rely on risk aversion and inequality aversion cannot fully explain subjects’ redistributive preferences. We also consider other factors, such as fairness considerations, social class memberships, and overconfidence in income expectations as potential drivers.