Absolute gains, relative losses: How the poor and the rich view redistribution differently

Abstract

How do people perceive the utility of redistribution? Support for redistribution is commonly understood as being determined by self-interest in a way that is monotonically proportional to expected net transfers. However, this would imply that average support for redistribution is static and unaffected by changes in the distribution of incomes. This study addresses this incongruence by integrating concepts from the literature on redistribution preferences, namely the diminishing marginal utility of income, inequity aversion and loss aversion. These concepts are formalized by making two distinctions regarding redistribution: absolute versus relative utility and gains versus losses. An analysis of the European/World Values Survey suggests that the preferences of the poor are determined by absolute gains, while the preferences of the rich are determined by relative losses. In other words, the poor care about how much they gain from redistribution, while the rich care about the share of their income that they lose from it. The findings have important implications for the relationships among public opinion, economic development and income inequality.