Beiträge zur Jahrestagung des Vereins für Socialpolitik 2016: Demographischer Wandel - Session: Inequality: Theory and Perceptions C06-V2
Subjective views of the extent of inequality and preferences for redistribution depend on how people perceive the true income (wealth) distribution. We present a novel formal framework in which individuals look at reference groups when guessing the extent of inequality and derive its implications for four dimensions of inequality perceptions. First, we show that the presence of reference groups that put more weight on the own income class leads low (high) income individuals to overestimate (underestimate) their own position. Second, the framework implies that subjective estimates of the average income increases with the own income position. Third, it predicts that people in different income deciles will assess the "distributional shape" of society (e.g. pyramid or diamond) differently. Fourth, the subjective extent of inequality is lower for high-income individuals. While the previous literature has treated these aspects of inequality separately, our model demonstrates that they are connected and follow from a unified framework of reference group formation. This allows us to study these and to reconcile conflicting findings from the literature. We confront these predictions with survey data from 40 countries and find strong support for the model.