Inequality and incentives with societal other-regarding preferences

The article is concerned with understanding the impact of social preferences and wealth inequality on aggregate economic outcomes. We investigate how different manifestations of societal other-regarding preferences affect labor relationships and incentive contracts at the microeconomic level and how these in turn translate into macroeconomic outcomes. Increasing the workers' sensitivity to inequality raises effort and reduces wage costs for poor but not necessarily for rich workers. A parameterized version of the model roughly mimicking relevant key features of the industrialized world shows that, at the general equilibrium, increased initial wealth differences raise aggregate profit and output but entail distributional utility losses and increased inequality. (c) 2021 Elsevier B.V. All rights reserved.

Automated summary

This article examines how societal other-regarding preferences and wealth inequality impact economic outcomes. It finds that increasing workers' sensitivity to inequality can boost effort and reduce wage costs for poor workers, but not necessarily for the rich. A parameterized model reflecting key features of the industrialized world suggests that increasing initial wealth differences can raise aggregate profit and output, but also lead to distributional utility losses and increased inequality.