Biased perceptions of income distribution and preferences for redistribution: Evidence from a survey experiment

Abstract

Individual perceptions of income distribution play a vital role in political economy and public finance models, yet there is little evidence regarding their origins or accuracy. This study examines how individuals form these perceptions and posits that systematic biases arise from the extrapolation of information extracted from reference groups. A tailored household survey provides original evidence on the significant biases in individuals' evaluations of their own relative position in the distribution. Furthermore, the data supports the hypothesis that the selection process into the reference groups is the source of those biases. Finally, this study also assesses the practical relevance of these biases by examining their impact on attitudes towards redistributive policies. An experimental design incorporated into the survey provides consistent information on the own ranking within the income distribution to a randomly selected group of respondents. Confronting agents' biased perceptions with this information has a significant effect on their stated preferences for redistribution. Those who had overestimated their relative position and thought of themselves relatively richer than they were demand higher levels of redistribution when informed of their true ranking. This relationship between biased perceptions and political attitudes provides an alternative explanation for the relatively low degree of redistribution observed in modern democracies.

The psychological consequences of income inequality

“…That inequality is generally supported by those advantaged and opposed by those disadvantaged is clearest when looking at the change in attitudes when people who think that they are the beneficiaries of inequality discover that inequality actually harms them in some way. Finding out that one is not as advantaged as one imagined oneself to be increases people's worry about income inequality (Kuziemko, Norton, Saez, & Stantcheva, 2015) and increases their support for policies that ameliorate inequality (Cruces, Perez-Truglia, & Tetaz, 2013).…”

The Perception of Inequality of Opportunity in Europe

“…Moreover, a number of recent empirical contributions in psychology and economics have shown that the perception of inequality reported by people in opinion surveys does not correspond to income inequality as it is commonly measured (Norton and Ariely, ; Cruces et al ., ; Verme, ; Chambers et al ., ; Gimpelson and Treisman, ). Other contributions have shown that a society's structure can be perceived to be considerably less equitable than it actually is (Niehues, ).…”

Nordic Economic Policy Review

“…Mollerstrom et al (2015) conduct a survey experiment in Sweden and inform a treatment group about their true relative position, thereby exogenously (but truthfully) manipulating perceptions of relative income. They show that this causes changes in individual demand for redistribution and that the direction of these changes indicate that a substantial fraction of people do exhibit the theoretically proposed negative correlation between (perceived) relative income and demand for redistribution (see also Cruces et al, 2013, for evidence corroborating this conclusion).…”