Thammasat University students interested in economics, business, history, political science, sociology, psychology, allied health sciences, and related subjects may find it useful to participate in a free 15 January Zoom webinar on Quantifying the wellbeing cost of inequality.

The event, on Wednesday, 15 January at 8pm Bangkok time, is organized by IOE – Faculty of Education and Society, University College London, the United Kingdom.

The TU Library collection includes books about different aspects of wellbeing and inequality.

Students are invited to register at this link.

The speaker will be Assistant Professor Caspar Kaiser, who teaches behavioral science at Warwick Business School, the University of Warwick, the United Kingdom.

The event announcement states:

Greater incomes increase wellbeing. But this effect is not linear. Instead, income increases among the poor have greater effects than among the rich.

As has long been understood theoretically, inequalities in income may thereby lower average wellbeing. However, this insight has never been utilised empirically.

Caspar will explore the magnitude of this wellbeing ‘cost’ by estimating the curvature of the income-to-wellbeing relationship to predict the loss in average wellbeing due to inequality before converting this into monetary terms.

He will discuss how a sensibly implemented universal basic income could plausibly halve this loss.

In 2022, Assistant Professor Kaiser coauthored an article, Inequality, well-being, and the problem of the unknown reporting function in Proceedings of the National Academy of Sciences of the United States of America (PNAS). Excerpts:

Every politician, in every nation and in every era of history, eventually has to face a complex and emotive question. Should I try to redistribute money from my richer citizens to my poorer citizens? If so, by how much? This is a timeless issue. The appropriate answer to the question turns crucially on a claim that goes back hundreds of years to, for example, the philosopher Jeremy Bentham: “All inequality is a source of evil—the inferior loses more in the account of happiness than by the superior is gained.”

In an ideal world, a hypothesis of this sort would be tested in a giant randomized controlled trial (RCT), perhaps funded by a body such as the National Science Foundation of the United States. However, no funding body is likely to provide the necessary millions of dollars to run that experiment-until now. In a remarkable and important contribution to conceptual science and practical public policy, Ryan Dwyer and Elizabeth Dunn have—with the help of millionaire donors—run an RCT that comes close to that ideal.

Before the paper by Dwyer and Dunn, a long literature, going back to Richard Easterlin and Edward Diener among others, had established that there is an upward-sloping, although curved, relationship between being richer and saying in a survey that you feel happier. […]

The Breakthrough Contribution of Dwyer and Dunn Is to Place This Association on Firm Causal Foundations

Dwyer and Dunn create an experiment in which assignment to treatment is random. The authors’ work is an example of a more general movement in modern social science in which earlier correlational research is checked with experimental and quasiexperimental designs. They add also to an emerging causal literature on cash transfers and well-being in low- and middle-income countries.

Dwyer and Dunn deliberately field the same kind of cash transfer in several different economic contexts. In this way, they connect two kinds of literature and demonstrate that cash transfers do indeed improve recipients’ self-reported well-being across a wide variety of settings. There are large causal effects that persist over at least a 6-mo period.

Crucially, in the authors’ experimental research, it is the poorer recipients of (randomly assigned) money who show larger psychological gains. From that, the authors conclude that a reduction in income inequality would raise overall well-being. Their argument has two parts. First, drawing on prior research in the literature, Dwyer and Dunn note that the well-being loss incurred by the (millionaire) donors of the cash is likely to be much smaller than the total well-being gains among recipients. Second, the authors discover that the cash transfers’ estimated effect-size appears to decline in a very particular way. It does so linearly in the log of recipients’ income. This is evidence of a curved (concave) well-being-to-income relationship. In other words, as Bentham hypothesized, there are diminishing marginal returns to income.

As is well known, a concave relationship between income and well-being entails that wider income inequality will pull down the average level of well-being. This is a corollary of a theorem known as Jensen’s Inequality in mathematics.

Three Scientific Complications Now Stand Out

One complication—formally recognized more than half a century ago, but it continues to be hotly debated in political life—is that tax-funded redistribution may distort incentives and thereby dampen economic growth. If so, redistribution could act to raise well-being via a more equal income distribution but at the same time could lower well-being by decreasing the size of the ‘pie’. Assessing the relative importance of these countervailing forces—as discussed in conventional economics courses—remains a priority.

Loss aversion is a second complication. Income losses are known to loom larger than gains. In the short term, therefore, the well-being losses of those who are taxed may exceed the gains of net recipients. Based on earlier work, Dwyer and Dunn suggest that voluntarily giving money away can increase people’s well-being. Whether that is also true in the case of forced redistribution is an open question. It may eventually be possible to answer that by building on current studies of loss aversion.

The Third Complication is the Most General

It clearly seems as though Dwyer and Dunn give causal evidence for a curved well-being shape. Yet, as they mention in passing, although they do not elaborate, their paper depends on an untested assumption. It is that the relationship between reported well-being and the underlying actual well-being is linear. Whilst scattered work hints at possible linearity, nobody currently knows whether that is true. It depends on how humans use language when they answer happiness kinds of questions.

This is a particular version of a generalized difficulty outlined in a recent piece by Bond and Lang and previously discussed in Oswald. The earlier literature on psychophysics also grappled with this. Without knowledge of the ‘reporting function’, we cannot be sure that we can treat well-being data as ratio-scale measurements, which is required for statements like “three times more happiness”.

(All images courtesy of Wikimedia Commons)