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Too Costly to Correct: An Experimental Study o

Hao Hong

Graduate student

Department of Economics

Pennsylvania State University

 

Jianfeng Ding

Graduate student

China Center for Economic Research

Peking University

 

Yang Yao

Professor

China Center for Economic Research &

National School of Development

Peking University

 

 

Abstract: When governments allocate resources to people, people have different levels of abilities to use those resources to generate income. We conduct an experiment of the divinity game to study a hypothetic social planner’s willingness to pay to correct unequal distribution of abilities. The social planner is asked to distribute money from a fixed budget to two other subjects who have different abilities to convert the transfers into their own income. Twenty rounds are conducted that allow the social planner’s budget and the gap of abilities between the two other subjects to vary between rounds. The social planner’s willingness to pay for equal abilities is measured by the equivalent variation (EV), i.e., the amount of money he would like to forgo to avoid a larger gap of abilities. Both parametric and nonparametric estimations show that the willingness to pay for eliminating the same amount of inequality of abilities declines when the initial inequality starts larger. This result contributes to the experimental literature on the tradeoff between equality and efficiency and sheds lights on the explanation of persistent inequality in some societies.

Keywords: the equality-efficiency tradeoff; willingness to pay; the divinity game

JEL classification: D63, D78

No. E2010015.pdf

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