| American Economic Review
Fairness and Redistribution: Comment
In an influential paper, Alesina and Angeletos (2005)—henceforth, AA—argued that a preference for fairness could lead two identical societies to choose different economic systems. In particular, two equilibria might arise: one with low taxes and a belief that the income-generating process is "fair" because effort is important (an "American" equilibrium) and another with high taxes and the belief that the process is "unfair" because luck prevails. Piketty (1995) had shown that a similar pattern could arise from standard preferences if initial beliefs about the relative importance of effort and luck in generating income differed across the two societies, while Benabou and Tirole (2006) study this issue using more realistic preferences (Buera, Monge-Naranjo, and Primiceri 2011 discuss the evolution of beliefs about economic systems). A key contribution of AA is to obtain these two equilibria from identical societies assuming agents prefer outcomes that are fair, an important modification because fairness considerations seem central in the demand for redistribution, and because in several settings (as in some ultimatum games) such preferences for fairness can lead to large (material) inefficiencies.
In this note we report a difficulty we encountered when interpreting the results in AA: we find multiplicity (and demand for redistribution) even if luck plays no role. In other words, there is multiplicity even if the equilibrium tax rate is independent of the signal-to-noise ratio (a quantity that expresses how important effort is, relative to luck, in the determination of income). This conflicts with the notion that the signal-to-noise ratio plays a central role in generating multiplicity with AA preferences for fairness.
Values and Beliefs;