Experimental & Behavioural Economics Seminar - Hui-Wen Ng (Brown University)

Title: Personal Experience and Preferences for Redistribution: An Experimental Analysis

Abstract: The experience of economic success or failure may affect people's attitudes towards redistribution. In this paper, we study the role of two behavioral biases as potential channels: overconfidence and in-group bias. We run a laboratory experiment where participants are randomly assigned income based on either their task performance or chance. After observing their income, they choose a tax rate that affects the level of inequality in others' final income, where a higher tax rate corresponds to lower inequality. We find that both overconfidence and in-group bias have an impact on chosen tax rates. First, due to mistakes in beliefs about own ability, overconfident subjects choose a 23 percentage point lower tax rate when they experience success and a 11 percentage point higher tax rate when they experience failure. Second, subjects exhibit an in-group bias: those who were assigned high income chose a 27 percentage point lower tax rate, on average, than those who were assigned low income, solely due to this bias. However, the average impact of biased beliefs on the whole subject pool is close to zero and is much less significant than the effect of in-group bias. These findings suggest that in the presence of behavioral biases, the sheer experience of different economic outcomes can lead to the polarization of preferences for inequality.