Biased Perceptions of Income Distribution and Preferences for Redistribution: Evidence from a Survey Experiment

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1 DISCUSSION PAPER SERIES IZA DP No Based Perceptons of Income Dstrbuton and Preferences for Redstrbuton: Evdence from a Survey Experment Gullermo Cruces Rcardo Pérez Trugla Martn Tetaz May 2011 Forschungsnsttut zur Zukunft der Arbet Insttute for the Study of Labor

2 Based Perceptons of Income Dstrbuton and Preferences for Redstrbuton: Evdence from a Survey Experment Gullermo Cruces CEDLAS-UNLP, CONICET and IZA Rcardo Pérez Trugla Harvard Unversty Martn Tetaz CEDLAS-UNLP Dscusson Paper No May 2011 IZA P.O. Box Bonn Germany Phone: Fax: E-mal: za@za.org Any opnons expressed here are those of the author(s) and not those of IZA. Research publshed n ths seres may nclude vews on polcy, but the nsttute tself takes no nsttutonal polcy postons. The Insttute for the Study of Labor (IZA) n Bonn s a local and vrtual nternatonal research center and a place of communcaton between scence, poltcs and busness. IZA s an ndependent nonproft organzaton supported by Deutsche Post Foundaton. The center s assocated wth the Unversty of Bonn and offers a stmulatng research envronment through ts nternatonal network, workshops and conferences, data servce, proect support, research vsts and doctoral program. IZA engages n () orgnal and nternatonally compettve research n all felds of labor economcs, () development of polcy concepts, and () dssemnaton of research results and concepts to the nterested publc. IZA Dscusson Papers often represent prelmnary work and are crculated to encourage dscusson. Ctaton of such a paper should account for ts provsonal character. A revsed verson may be avalable drectly from the author.

3 IZA Dscusson Paper No May 2011 ABSTRACT Based Perceptons of Income Dstrbuton and Preferences for Redstrbuton: Evdence from a Survey Experment * Indvdual perceptons of ncome dstrbuton play a vtal role n poltcal economy and publc fnance models, yet there s lttle evdence regardng ther orgns or accuracy. Ths study examnes how ndvduals form these perceptons and posts that systematc bases arse from the extrapolaton of nformaton extracted from reference groups. A talored household survey provdes orgnal evdence on the sgnfcant bases n ndvduals evaluatons of ther own relatve poston n the dstrbuton. Furthermore, the data supports the hypothess that the selecton process nto the reference groups s the source of those bases. Fnally, ths study also assesses the practcal relevance of these bases by examnng ther mpact on atttudes towards redstrbutve polces. An expermental desgn ncorporated nto the survey provdes consstent nformaton on the own rankng wthn the ncome dstrbuton to a randomly selected group of respondents. Confrontng agents based perceptons wth ths nformaton has a sgnfcant effect on ther stated preferences for redstrbuton. Those who had overestmated ther relatve poston and thought of themselves relatvely rcher than they were demand hgher levels of redstrbuton when nformed of ther true rankng. Ths relatonshp between based perceptons and poltcal atttudes provdes an alternatve explanaton for the relatvely low degree of redstrbuton observed n modern democraces. JEL Classfcaton: D31, D83, H24, H53, I30 Keywords: perceptons of ncome dstrbuton, lmted nformaton, preferences for redstrbuton, feld experment Correspondng author: Gullermo Cruces CEDLAS, Facultad de Cencas Económcas Unversdad Naconal de La Plata Calle 6 entre 47 y 48, 5to. Pso ofcna 516 (1900) La Plata Argentna E-mal: gcruces@cedlas.org * Fundng for the Encuesta de Percepcones Dstrbutvas y Redstrbucón was generously provded by Span s Fundacón Carolna ( and by PEGNet the Poverty Reducton, Equty and Growth Network ( Addtonal fundng was made avalable n the form of SECYT (PICT) and CONICET (PIP) grants. Part of ths work was developed whle Gullermo Cruces was vstng STICERD (LSE) n January and February 2008, wth the support of a Brtsh Academy Vstng Fellowshp. The opnons n ths paper are those of the authors and do not represent the vews of the fundng agences or of the nsttutons to whch they belong. The authors are ndebted to Ra Chetty, who provded detaled comments on an early draft of ths paper, and to Alberto Alesna for valuable feedback on the frst completed verson. The authors also wsh to thank Franços Bourgugnon, Frank Cowell, Rafael D Tella, Gary Felds, Leonardo Gasparn, Andrés Ham, Matt Rabn, Walter Sosa Escudero, Julán Troksberg and Carlos Wnograd for valuable dscussons on the proect leadng to the preparaton of ths paper. They are also grateful for comments made by Aleandro Bonvecch, Juan Dubra, Emlo Espno, Chco Ferrera, Laura Guarda, Juan Carlos Hallak, Aleandro Manell, Andrés Neumeyer, Hugo Ñopo, Laura Rpan, Martín Ross, Ernesto Schargrodsky, Jacques Slber, Marano Tommas and other semnar partcpants at the 2009 PEGNet conference (The Hague, September 2009), LACEA (Buenos Ares, October 2009), Unversdad de San Andrés (2010), NIP (Unversdad de la Repúblca, Montevdeo, 2010) and Unversdad Torcuato D Tella (Busness School, 2010, and Economcs Department, 2011). Darío Tortarolo and Florenca Pnto provded a metculous consstency analyss of the survey data. The usual dsclamer apples.

4 1 Introducton The shape of the ncome dstrbuton plays a key role n the determnaton of polces wth redstrbutve components (such as socal securty, health care, government transfers and taxaton) n poltcal economy and publc fnance models. However, the man polcy determnant s not ts actual shape, but rather how t s perceved by agents n the economy. Ths study flls a gap n the lterature by explorng the causes and consequences of systematc bases n ndvduals perceptons of aggregate ncome dstrbutons. The fndngs presented n ths paper contrbute to the recent lterature on the ncorporaton of subectve perceptons and nference problems nto the determnaton of poltcal economy outcomes (for a semnal contrbuton see Pketty, 1995). For nstance, when formng ther vews on publc polces, agents may need to nfer the mportance of effort and predetermned factors n the ncome generaton process (Pketty, 1995; Bénabou and Trole, 2006), they may evaluate prospects of economc moblty (Bénabou and Ok, 2001; Alesna and La Ferrara, 2005), or they may arrve at conclusons as to the causes of poverty and the farness of socoeconomc outcomes n general (Alesna and Glaeser, 2004). To form ther udgments, vews and atttudes, agents need to make dffcult nferences about dstrbutonal outcomes (e.g., nequalty, moblty) based on lmted nformaton and wthn gven tme constrants, but there s as yet lttle evdence on the orgns or the accuracy of the nferences they make n ths regard. Ths paper also makes a contrbuton to a growng body of work that attempts to document agents expectatons and subectve probabltes (Mansk, 2004; Hurd, 2009) and explan ther formaton (Zafar, 2011). In an applcaton to dstrbutonal ssues, Norton and Arely (2011) elct nformaton on Amercan s perceptons of the wealth dstrbuton n ther socety and fnd sgnfcant dscrepances between actual and perceved levels of nequalty. The results presented n ths paper not only document systematc dscrepances between obectve and subectve ncome dstrbutons, but also provde a seres of tests for the orgns and the consequences of such dscrepances. The assessment of an ncome dstrbuton by an economc agent can be regarded, fundamentally, as a statstcal nference problem. Indvduals observe the ncome levels of no more than a sub-sample of the populaton and must nfer the entre dstrbuton from that nformaton. If agents do not fully account for the selecton process nvolved n the formaton of the sample they observe, ther nferences wll be systematcally based. Ths falure may be due to lmtatons n the nformaton set avalable to the agents the nformaton mght be 2

5 costly or unavalable. Alternatvely, agents may have the necessary nformaton, but they may sometmes fal to use t correctly, as argued n the cogntve bas lterature (Rabn, 1998; Camerer, Loewensten, and Rabn, 2003). Irrespectve of whether agents have lmted nformaton or bounded ratonalty, ths ratonalzaton of dstrbutonal perceptons provdes a seres of corollares that can be tested wth data on obectve and perceved dstrbutons. The emprcal results n ths paper are based on the Survey on Dstrbutonal Perceptons and Redstrbuton, a study of 1,100 households representatve of the Greater Buenos Ares area n Argentna. The survey was desgned and mplemented n 2009 for the specfc purpose of testng the posted mechansms for the formaton of dstrbutonal perceptons. Data were collected on each respondent s household ncome and on hs or her assessment of ts rankng (to the closest decle) n the overall ncome dstrbuton. The frst fndng s the presence of systematc bases n perceptons of own ncome rank: a sgnfcant porton of poorer ndvduals place themselves n hgher postons than they are, whle a sgnfcant proporton of rcher ndvduals underestmate ther rank. Moreover, as predcted by the theory, the bas s sgnfcantly correlated wth the respondent s relatve poston wthn the reference group (as proxed by area of resdence). Also n keepng wth the theory, respondents wth frends from heterogeneous socal backgrounds are less prone to these bases. Fnally, the analyss explores how these msperceptons about the ncome dstrbuton may affect atttudes towards redstrbuton. For nstance, self-nterest mght nduce poor ndvduals to demand less redstrbuton f they thnk they are relatvely rcher than they actually are. The document presents the results from a unque randomzed experment that was mplemented wthn the survey: for a randomly assgned treatment group, the ntervewer hghlghted any dscrepancy between the subectve assessment of the respondent s rankng and that respondent s actual poston, effectvely correctng any bas that was present. Ths survey feld experment contrbutes to the lterature on nformaton provson as a treatment (Duflo and Saez, 2003; Chetty and Saez, 2009; Card et al., 2010). An orgnal feature s that perceptons are not only contrasted wth realty (as n Olken, 2009, among others): the survey experment provdes feedback and actually confronts based subects wth consstent nformaton. The results from the experment ndcate that confrontng agents based perceptons wth consstent nformaton had a sgnfcant effect on stated preferences for redstrbuton. Those who overestmated ther relatve poston (who thought of themselves to be relatvely rcher than they were) and were provded consstent nformaton demanded more 3

6 redstrbuton than those n the control group. To the degree that the nformaton treatment managed to correct based dstrbutonal perceptons, these results can be nterpreted as evdence of the effect of bases n dstrbutonal perceptons on poltcal atttudes. Specfcally, upward bases n perceptons of own rank among the less well-off reduce ther demands for redstrbuton. Ths fndng consttutes an alternatve to theores that post prospects of upward moblty (Bénabou and Ok, 2001) or other factors as accountng for the relatvely low levels of demand for redstrbuton n modern democraces. Ths paper s organzed as follows. The next secton dscusses the formaton of subectve ncome dstrbutons and ndvduals perceptons of ther ncome rank, and explores these factors mplcatons for atttudes towards redstrbuton. The thrd secton descrbes the household survey and the randomzed experment that was desgned to answer these questons. The fourth secton presents the emprcal results. The last secton concludes. 2 Subectve ncome dstrbutons and potental bases 2.1 Subectve ncome dstrbutons and reference groups Economc agents assessments of ncome dstrbutons depend on ther access to nformaton and on ther ablty to process the relevant data. The latter consttutes a trval matter n a perfect nformaton context, where the ncomes of all members of socety are observed. However, n the presence of lmted nformaton, these assessments become statstcal nference problems. Indvduals are constantly exposed to the ncome levels of others through, for nstance, the meda and socal nteracton wth acquantances, co-workers, employees, etc. Even f they nteract prmarly wth ndvduals exhbtng smlar characterstcs, ratonal agents may arrve at consstent estmates of the entre dstrbuton by factorng n the selecton process of the non-representatve sample of ncomes that they observe. The dstrbuton of ncome n socety as a whole s gven by the densty functon An agent can nfer f (or some statstc of f. f the mean, the medan, or the agent s own rankng n the dstrbuton) usng the nformaton about the ncomes that he or she has observed. Ths sub-sample of observed ncomes consttutes agent s reference group, The term P( S ) denotes the probablty that a randomly chosen ndvdual belongs to group S, and PS denotes the proporton of the whole populaton that belongs to S. S. 4

7 Let P( x ) be the selecton equaton, whch represents the probablty that S ndvdual belongs to the reference group S gven that hs or her ncome s x. From the observed ncomes, the agent can derve a consstent estmate of the dstrbuton of ncomes wthn her or hs reference group, f(x S ). That densty dstrbuton s related to the uncondtonal densty dstrbuton not ust group ) by the followng dentty: f(x f(x ) (.e., the densty of the entre dstrbuton of ncomes, P( S x ) S ) f(x ) (1) P S Agent s deemed sophstcated (subscrpt S) f he or she apples Bayes rule to nfer the ncome dstrbuton for the entre populaton from the observed subset ( S ): f S PS (x) f(x S ) (2) P( S x ) To make the nference gven by equaton (2), agent requres nformaton about the relatve sze of the reference group ( P ), knowledge about the selecton process leadng to S the formaton of that reference group ( P( x ) ), and the ablty to make probablty udgments. Any devaton from these condtons wll result n based perceptons about S f(x ). There are several sources of devatons from these condtons. For nstance, the nformaton about P( S x) or f(x ) may be costly to acqure, or the advantages of dong so mght not be evdent. In equlbrum, they may opt for good enough naïve estmates. It may also be the case that, as n Benot and Dubra (2011), the naïve estmate represents the best possble answer that can arse from ratonal agents extrapolatons condtoned on the nformaton set avalable to them. The key factor n ths stuaton s the lmted nformaton about reference groups or about the selecton process leadng to reference groups. 1 Alternatvely, ndvduals may fal to consder all the avalable nformaton, or they may use t ncorrectly (Smon, 1972). For example, agents may use heurstcs or rules of thumb when dealng wth dffcult questons of statstcal nference, and such rules of thumb can, on occason, be very mprecse. Indeed, the use of heurstcs n statstcal nference and the systematc bases that such exercse entals s a well-documented phenomenon n the 1 A specal case s gven by a complete lack of nformaton about a subgroup of the populaton. If P( x ) s zero for some x (.e., the ndvdual does not observe some ncome ranges wth probablty one), then even wth the ablty to make probablty udgments and wth full knowledge of P( x ) the agent wll stll not be able to apply Bayes rule. S S 5

8 cogntve lterature (Kahneman, Slovc and Tversky, 1982). The most relevant case n ths dscusson s the representatveness heurstc, n whch ndvduals fal to apply Bayes rule to the nformaton they obtan (Kahneman and Tversky, 1972; Tversky and Kahneman, 1974). Ths falure leads to a systematc cogntve bas, the base rate neglect. 2 These two possbltes, lmtatons n nformaton and bounded ratonalty, can be llustrated by a stuaton n whch a naïve agent does not properly apply Bayes rule as n equaton (2). In the extreme case, rrespectve of the source of the bas, the naïve agent wll smply use the nformaton about the ncome dstrbuton wthn hs or her reference group as f t were representatve of the entre populaton. The belefs of naïve agents n ths extreme N case are denoted by the superscrpt N: f (x ). Equaton (3) establshes the relatonshp between the perceptons of sophstcated and naïve agents: f N (x ) P( S S f(x S ) f (x ) (3) PS x ) N From f (x ) t s straghtforward to obtan the naïve estmates of many characterstcs of the ncome dstrbuton, lke the mean, medan, dsperson, and proporton of ndvduals N N under the poverty lne, F (x poor ), among others. Therefore, any bases n f (x) are lkely to generate bases n a wde set of perceptons of the ncome dstrbuton. If the formaton of reference groups s orthogonal to ncome, then the selecton equaton wll be such that P( S x ) P( S ) ; that s, on expectaton, every group wll be representatve of the whole populaton. In ths case, t would be consstent to use the wthn-group dstrbuton as an estmate of the dstrbuton for the entre populaton. The selecton equaton, however, s probably a functon of ncome. A probablty P( x ) ncreasng n x represents the case of an agent who has a rch reference group and s therefore more lkely to observe hgher-ncome ndvduals. Conversely, f agent nteracts manly wth lower-ncome ndvduals (.e., a poor reference group), then P( x ) s decreasng n x. Ths s llustrated n Fgure 1. Fgure 1a depcts the ncome dstrbuton for the whole populaton and for a rch reference group, whch exhbts fst-order stochastc domnance over the dstrbuton for the whole populaton (.e., for every ncome level n the reference group there s a greater share of people below that ncome level than n the whole S S 2 The base rate neglect has been ncorporated n economc models and emprcal applcatons before (see Grether, 1980, 1990; Rabn, 1998; Camerer et al., 2003; DellaVgna, 2009). 6

9 populaton). Snce naïve agents use the nformaton about the ncome dstrbuton wthn ther reference group as f t were representatve of the entre populaton, naïve agents n the rch reference group wll underestmate the actual cumulatve ncome dstrbuton for every ncome level,.e., F N (y) F(y) for all y. In Fgure 1a, ths s llustrated for a gven ncome y 1 by the dfference between the areas flled wth horzontal and vertcal lnes. Conversely, naïve agents wth poor reference groups wll overestmate the cumulatve ncome dstrbuton for every ncome y. The results are not straghtforward when there s no stochastc domnance of the dstrbuton wthn a reference group over that of the whole populaton. Fgure 1b llustrates ths result by showng a mddle-class reference group, where agents underestmate F(y) for ncome levels y<y* and overestmate F(y) for ncomes y>y*. There s an ntutve way to relate the sze and drecton of the bas n F N (y) to the selecton process for reference groups, P( x ). Takng the ntegral of equaton (3) from 0 to y, some algebrac manpulaton results n the followng expresson: F N S y f (x ) P( S x y (y) N S 0 (y) f (x )dx F (y) (4) P 0 S ) dx S F (y) R S F (y) S P S The term R (y) represents the average probablty of belongng to group S for ndvduals wth ncomes below y. If agent has a rch reference group, those wth ncomes lower than y have a lower probablty of belongng to the rch reference group than the average of ths probablty for the entre populaton, so R (y) P S. As a result, agents wth rch reference groups underestmate the entre cumulatve dstrbuton functon: F N (y) F(y) for all y. N The expresson f (x) n equaton (3) can be used to compute naïve perceptons of dfferent moments and statstcs of the ncome dstrbuton. For nstance, f reference groups are more homogeneous n ncome than the whole populaton (as t s lkely to be the case), perceptons about ncome nequalty wll be based downwards for all agents. Indeed, ths s consstent wth Norton and Arely s (2011) fndng that ndvduals systematcally underestmate the level of nequalty n the dstrbuton of wealth n the Unted States. N A crucal parameter for ths study s F (x ), the percepton of an agent s own ncome rank wthn the dstrbuton. Snce agents wth rch reference groups underestmate all ponts n the cumulatve dstrbuton (ncludng x ), t follows that they wll underestmate ther own 7

10 rank n the dstrbuton. Conversely, naïve agents wth poor reference groups wll overestmate ther rank. Fnally, t s mportant to note that these naïve estmates represent extreme cases n whch agents completely fal to take nto account the selecton process of ther reference group. The model can be generalzed by lettng ndvduals make mperfect nferences usng some nformaton about the selecton equaton, P( x ). If the ndvdual underestmates the mportance of ncome n the formaton of reference groups, then the bases wll be qualtatvely smlar to those presented n the extreme naïve case. S 2.2 Based perceptons and preferences for redstrbuton Msperceptons of ncome dstrbuton can have substantal mplcatons n the determnaton of polcy outcomes. Ths can be llustrated by ncorporatng based perceptons nto a basc Meltzer and Rchard (1981) type of framework wth a smple redstrbutve polcy reform n whch taxes would fnance some benefts. The populaton can be dvded by ncome levels nto potental net losers and wnners: ndvduals above a gven -quantle would lose n net terms f the redstrbutve polcy were mplemented, whle those below t would gan from the reform. For nstance, wth a lnear ncome tax and lump-sum redstrbuton, agents below the medan ncome wll beneft and those above the medan wll lose. If agents have based perceptons of ther own ncome rankng, ther evaluatons of how these costs and benefts wll affect them are lkely to be naccurate. The agents that wll beneft from the polcy are those whose actual relatve ncome s below the -quantle: ) F(y. Snce they are relatvely poor, most of these agents are lkely to have poor reference groups, and naïve agents among them wll therefore over-estmate ther own rankng. Some of these naïve agents wll consder themselves potental non benefcares of the reform, snce ther perceved relatve ncome s above the -quantle: F N (y ). Thus, there wll be a group of agents who erroneously beleve that they would not beneft from further ncome redstrbuton when they actually would:.e., those wth ncomes between y L -1 F N -1 and y F H. Wth access to the correct nformaton about ther actual ncome rank, self-nterest would make these ndvduals change ther atttude and favor, rather than oppose, the redstrbutve polcy. Analogously, a group of naïve ndvduals wth rch reference groups wll beleve that they would beneft from the redstrbutve polcy, 8

11 although they would actually be net contrbutors. If those ndvduals are purely selfnterested, provdng them wth consstent nformaton about ther ncome rankng would make them oppose, rather than favor, the redstrbutve polcy. The expermental desgn of the survey used n ths study allows for a drect test of ths mechansm. However, ths smple framework has some shortcomngs. The recent poltcal economy lterature has dscussed at length the fact that ndvduals may be motvated by more than self-nterest, so preferences for redstrbuton may reflect a wder set of factors. For nstance, agents may have altrustc motves and ncorporate farness consderatons nto ther decsons regardng ther support for redstrbuton. 3 As dscussed above, the bases gven by equaton (3) translate nto based perceptons of many characterstcs of the dstrbuton of ncome, ncludng the poverty count and socal welfare, whch could nfluence an ndvdual s support towards redstrbutve polces through altrustc concerns. The smplest llustraton s that of aggregate deprvaton. Wth a poverty lne z, F(z) s the actual poverty headcount and F N ( z ) ts based perceved level. Naïve ndvduals wth rch (poor) reference groups wll underestmate (overestmate) the aggregate poverty headcount. 4 If preferences for redstrbuton are ncreasng n the perceved poverty level, then altrustc naïve agents wth rch (poor) reference groups would support more (less) redstrbuton upon correctng ther based perceptons. As a result, provdng consstent nformaton to naïve ndvduals may have conflctng effects n terms of ther support for redstrbuton from the perspectve of selfsh and altrustc motves. The experment descrbed below, however, dentfes only the net effect of provdng consstent nformaton on the ncome dstrbuton on atttudes towards redstrbutve polces. 3 Fong (2001), Luttmer (2001), Rottemberg (2002), Alesna and Glaeser (2004) and Alesna and Angeletos (2005) study the effect of altrustc and farness concerns on atttudes towards redstrbuton. See Alesna and Gulano (2009) for more references. 4 Ths concluson s part of a more general result. For any socal welfare functon ncreasng n ncome (Cowell, 2000), frst-order stochastc domnance of an ncome dstrbuton over another mples that socal welfare under the frst dstrbuton s greater than socal welfare under the second dstrbuton. If the dstrbuton of ncomes n the rch (poor) neghborhood domnates (s domnated by) the dstrbuton n the whole populaton, t follows that naïve ndvduals n the rch (poor) reference groups wll overestmate (underestmate) true socal welfare. 9

12 3 Data source and expermental setup: Survey on Dstrbutonal Perceptons and Redstrbuton 3.1 Survey on Dstrbutonal Perceptons and Redstrbuton The dscusson n the prevous secton covered the formaton of subectve ncome dstrbutons, the possblty of systematc bases, and ther mplcatons for atttudes towards redstrbuton. The emprcal nvestgaton n ths paper s based on the Survey on Dstrbutonal Perceptons and Redstrbuton, a study of 1,100 households representatve of Greater Buenos Ares n Argentna. The survey was carred out n March 2009 and conssted of face-to-face ntervews of a random sample of that populaton. It was specfcally desgned to test the model presented n the prevous secton and, to that end, collected data on a set of ndvdual and household characterstcs and on respondents labor-market and other socoeconomc outcomes, as well as ther answers to a seres of questons about ther poltcal vews and atttudes. It also gathered nformaton on the respondents actual household ncome and on ther perceptons of ther own ncome rank wthn the dstrbuton for the whole country. There are several ways of recoverng subectve probablty dstrbutons for a contnuous varable such as ncome, whch nclude elctng quantles, moments or ponts of the dstrbuton (see Mansk, 2004). For nstance, Norton and Arely (2011) collected nformaton on respondents evaluatons of the proportonal dstrbuton of total wealth among quntles n the Unted States. The Survey on Dstrbutonal Perceptons and Redstrbuton reled on an orgnal nstrument (the ncome-rank evaluaton queston), whch elcted a specfc value of the cumulatve subectve dstrbuton: ts evaluaton at the pont where each respondent thought hs or her household stood. 5 The queston was worded as follows: There are 10 mllon famles n Argentna. Of those 10 mllon, how many do you thnk have an ncome lower than yours? 6 The survey also collected data on the households total monthly ncome by ntervals. Whle dstrbutonal ndcators often rely on per capta or adusted ncome, a plot conducted n December 2007 ndcated that ndvduals compare ncomes n terms of total household monthly levels. The ntervals were chosen by the research team to correspond to the boundares of decles of natonal total household ncome 5 Nuñez (2005) collected nformaton about the respondents evaluaton of the percentage of households above and below ther ncome level n Chle. The approxmate number of households n Argentna at the tme of the survey (10 mllon) allowed the queston to be phrased n terms of mllons of households on a smple 1-10 scale, thus elmnatng the need for respondents to be comfortable n answerng n percentage terms. 6 Ths nformaton dffers conceptually from measures of subectve economc welfare (Ravallon and Lokshn, 2002), snce t attempts to capture an obectve parameter of the dstrbuton. In ths sense, t s closer to the lterature on elctaton of subectve probabltes (Hurd, 2009). 10

13 dstrbuton at the tme of the survey to facltate the comparson of obectve and perceved poston n the dstrbuton n the expermental desgn The survey experment setup Besdes the ncome rank queston, the second and most nnovatve aspect of the survey was the mplementaton of an expermental desgn ncorporated nto the questonnare. Randomzed questonnare-experments had been developed n laboratory settngs (Amel and Cowell, 1992; Cowell and Cruces, 2004), whle, n the context of household surveys, Jolffe (2001) and D Tella, Galan and Schargrodsky (2008) have randomzed the allocaton of questonnare types among respondents. 8 As n these prevous studes, the expermental setup for ths survey nvolved randomly allocatng two dfferent types of questonnares to ntervewees, although the questons asked to the respondents were the same. The orgnalty of ths setup stems from the nature of the treatment, n whch the ntervewer provded feedback to respondents n the treatment group n the form of consstent nformaton on the ncome dstrbuton. Specfcally, after collectng nformaton on household characterstcs, ncome levels and postonal perceptons, the ntervewer nformed respondents n the treatment group whether ther estmates of relatve ncome concded wth those of the research team. The ntervewer read the followng statement (wth X and Y beng determned by prevous answers): Based on your ncome level, the latest studes conducted by the Unversty ndcate that there are X mllon famles wth an ncome lower than yours, whle you stated that there were Y. The ntervewer then read out one of the three followng statements, dependng on the accuracy of the X/Y comparson: (1) In fact, there are more famles wth a lower ncome than yours than you beleved, (2) You were rght about how many famles have a lower ncome than yours, or (3) In fact, there are fewer famles wth a lower ncome than yours than you beleved. The presence of a bas n ther perceptons was thus explctly ponted out to respondents n the treatment group. After the treatment, the questonnare was used to collect nformaton on atttudes about specfc redstrbutve polces of nterest n Argentna wthn the poltcal context exstng at the tme of the survey. The questonnare for the control group dd not 7 The use of ncome ntervals sgnfcantly reduces non-response rates. The notes n appendx table A1 provde further detals on the constructon of the ntervals and ther mplementaton by ntervewers n the survey. 8 Survey experments have also been conducted n the context of poltcal scence and publc opnon research (see, for nstance, Horuch et al., 2007; Hanmueller and Hscox, 2010). 11

14 contan the feedback secton, but was exactly the same n all other respects (Table A1 presents an extract of the questonnare and varable defntons). Ths expermental survey desgn contrbutes to a growng body of lterature concernng the provson of nformaton as a treatment n an expermental settng. For example, Duflo and Saez (2003) and Chetty and Saez (2009) provded subects wth nformaton on retrement plans and the tax code, respectvely, whle Jensen s (2010) study offered statstcs on returns to schoolng for teenagers, and Card et al. (2010) gave a group of employees access to nformaton on co-workers wages. There are also several studes that have contrasted subectve and obectve probabltes and ther relatonshp wth actual outcomes n connecton wth, for nstance, ncome expectatons versus realzatons (Mansk, 2004), obectve versus subectve ncome percentles (Nuñez, 2005) and perceved versus actual survval rates (Hurd, 2009). Ths study nnovated n a crucal way, however, by confrontng subects wth consstent nformaton whch dffered from ther stated perceptons. 4 Emprcal results and dscusson 4.1 Subectve ncome dstrbutons Ths secton presents the emprcal evdence from the Survey on Dstrbutonal Perceptons and Redstrbuton. The startng pont for the analyss s the dstrbuton of obectve and perceved ncome rank n the sample. Fgure 2a presents the ncome dstrbuton of the Greater Buenos Ares survey sample as a functon of decles of the natonal dstrbuton at the tme of the survey, whch served as the bass for the categores used for the household ncome queston. A natonally representatve sample would be depcted n the fgure as a horzontal lne at the 10 percent densty. The hgher concentraton n decles 5 to 9 s accounted for by hgher average ncome levels n Buenos Ares wth respect to the country average. Fgure 2b, n turn, presents the respondents perceptons of ther households postons n the dstrbuton, whch were elcted by posng the ncome-rank evaluaton queston descrbed n the prevous secton. By constructon, respondents dentfed what decle of the natonal dstrbuton they thought was the closest to ther ncome level. In contrast wth the farly even dstrbuton n Fgure 2a, the mode of the perceptons dstrbuton s gven by the ffth decle, wth almost 30 percent of respondents placng ther households at that level (and almost half n the mddle quntle correspondng to the ffth and sxth decles). Self-perceptons of ncome rank n the sample are thus substantally less dspersed than obectve ncome levels are. 12

15 The dfference between the two panels n Fgure 2 ndcates the presence of a bas n dstrbutonal perceptons. The bas s defned here as the dfference between a household s obectve ncome decle and the respondent s self-assessment of ts poston (n decles): those wth a negatve bas consder themselves to be n a lower poston than they really are, whle the opposte s true for those wth a postve bas. The dstrbuton of ths varable, depcted n Fgure 3a, ndcates that there are a sgnfcant number of cases of both postve and negatve bases. In fact, only about 15 percent of the respondents place ther household s ncome n the obectvely correct decle. However, the decles of a natonal ncome dstrbuton are relatvely narrow categores, and t s therefore qute plausble that respondents could have dffculty n ascertanng ther poston wth that degree of precson. To allow for measurement error n agents perceptons (Bertrand and Mullanathan, 2001) and n the levels of the obectve decle boundares, Fgure 3b presents an alternatve defnton of ths bas. Here, only respondents who devate from ther true poston by two decles or more are consdered to be based. As expected, the number of based responses s substantally lower than n Fgure 3a. However, Fgure 3b stll ndcates that, even wth ths less demandng defnton, more than 55 percent of the respondents exhbt some degree of bas, wth relatvely more cases of negatve bases (ndvduals placng themselves below ther true rankng) than postve ones. A further queston s whether there s a relatonshp between the dstrbutons depcted n Fgure 2. Table 1 and Fgure 4 present the relatonshp between obectve and perceved relatve ncome levels. Fgure 4a depcts the average of perceved own-ncome decles, by levels of obectve decles. There s a sgnfcant postve relatonshp between both varables, although the dstrbuton of subectve levels s consderably more concentrated. For nstance, the average perceved own-ncome decle fluctuates around 4.5 for the three poorest decles of the obectve ncome dstrbuton, but s less than 7 for those n the top obectve decle. Ths pattern has a drect correlate for the dstrbuton of the bas, whch s depcted n Fgure 4b as a functon of the obectve ncome decle: respondents at the top and the bottom of the obectve dstrbuton dsplay substantal negatve and postve bases, respectvely (of about -3.5 and 3 decles for the extreme categores). Moreover, the bas dmnshes up to the ffth obectve decle and ncreases monotoncally (n absolute values) from the sxth decle onward. Table 1 presents smlar nformaton on the bas for a partton of the populaton n quntles of the obectve ncome dstrbuton. The table also ndcates that postve bases are largely confned to respondents below the medan of the dstrbuton, whle those wth a negatve bas are concentrated n the fourth and ffth quntles. 13

16 4.2 Reference groups and based perceptons of ncome dstrbuton The dscusson so far has revealed the presence of substantal bases n dstrbutonal perceptons. Secton 2 posted a mechansm for the formaton of subectve ncome dstrbutons, whereby ndvduals extrapolated from nformaton about the ncome dstrbuton n ther reference groups n order to obtan estmates of the whole dstrbuton. Sophstcated agents (ratonal and nformed) can obtan a consstent estmate of the aggregate dstrbuton even f ther reference group s not fully representatve by correctly applyng Bayes rule (that s, accountng for the selecton process of the sample that they are observng). By contrast, a naïve ndvdual fals to apply ths rule and consders only hs or her reference group when makng nferences about the whole populaton; ths results n systematc bases f selecton nto reference groups s a functon of ncome. If reference groups bundle together ndvduals of smlar ncome levels, then one smple predcton of the model s that ndvduals wth rch reference groups (and therefore most rch ndvduals) tend to underestmate ther ncome rank, whereas ndvduals wth poor reference groups (and therefore most poor ndvduals) overestmate ther rank. Ths dstrbuton of bases s exactly the one depcted n the results above, most notably n Fgure 4b and Table 1. However, the observed pattern s also consstent wth other potental explanatons. For nstance, ndvduals may have a tendency to the mean (or the medan), as has actually been documented n the lterature on expectatons and subectve probabltes, 9 such that the mddle decles consttute focal-pont answers to the ncome-rank queston. Alternatvely, poorer respondents may feel embarrassed to admt that ther relatve ncome s low and thus over-report ther true (accurate) percepton, whle rcher ndvduals may not feel comfortable reportng ther hgh relatve poston 10 and thus under-report ther true (accurate) percepton. The survey allows for the use of a seres of emprcal means of testng the reference-group hypothess aganst these smple mechancal explanatons. In the dscusson presented n Secton 2, the entre set of ndvdual nteractons (wth frends, famly, co-workers, etc.) was regarded as consttutng the relevant reference group for the formaton of perceptons of ncome dstrbuton. The analyss here uses a geographcal 9 Hurd (2009) ponts out that when the true probablty of an event s greater than 0.50 [ ] the subectve probablty wll be understated and vce versa, and fnds several examples of survey responses wth focal ponts at 50 for dstrbutons between 0 and 100. Smlar factors mght be at work n the evaluaton of ncome dstrbutons. For nstance, 50.4 percent of respondents n the pooled General Socal Surveys n the Unted States stated that ther ncome was about average (own tabulatons). 10 Under-reportng of ncome for hgher levels s typcally a concern n household surveys. However, n ths case, the tendency of those wth hgher ncome levels to underestmate ther poston mples that underreportng at the top of the dstrbuton would reduce the number of those classfed as based. The substantal number of respondents wth a negatve bas can be consdered to be a lower bound. 14

17 approxmaton: an ndvdual s reference group s gven by hs or her area of resdence. Ths approxmaton s ustfed by the sgnfcance of socal networks at the neghborhood level for the exchange of nformaton on employment and other ncome-generatng actvtes (Topa, 2001; Bayer et al., 2008). 11 Moreover, areas of resdence provde a smple llustraton for a reference-group selecton mechansm based on ncome levels, gven the pervasve resdental segregaton of households by ncome levels n urban areas (Glaeser et al., 2008). The survey covered 41 randomly selected samplng ponts wthn 10 localtes of the Greater Buenos Ares metropoltan area. The samplng ponts correspond to a farly small set of street blocks and contan 26 households on average these are referred to as neghborhoods n the dscusson. The average obectve ncome level reported n the survey wthn each neghborhood s depcted along the horzontal axs of Fgure 5a. Ths fgure reveals substantal varaton n average ncomes for neghborhoods n the sample, whch range from an average obectve decle of 3 to ust below 8. The hypothess that a salent role s played by geographc reference groups n the formaton of dstrbutonal perceptons (and msperceptons) predcts a strong relatonshp between the economc level of the resdence area (as a proxy for the reference group) and the drecton of the bases. Fgure 5a llustrates the strong postve correlaton between average ncome levels and average perceptons at the neghborhood level. 12 Fgure 5b, n turn, fts the predcton of the model dscussed n Secton 2: ndvduals n lower-ncome neghborhoods (.e., wth average obectve ncome ranks below 4.5) overestmate, on average, ther ncome rank (postve average bas), and ndvduals n hgher-ncome neghborhoods (.e., wth average ncome ranks above 6.5) underestmate, on average, ther ncome rank (negatve average bas). The model also predcts that agents n mddle-class neghborhoods wll have a balanced mx of postve and negatve bases, possbly generatng a zero average bas. Ths s ndeed the case for neghborhoods wth average ncome decles between 4.5 and 6.5. Ths evdence suggests a role for geographc reference groups n the determnaton of subectve ncome dstrbutons, snce the above predctons are specfc to the referencegroup hypothess. 13 The nformaton collected n the survey allows for a sharper test. The dscusson n Secton 2 ponted out that fully naïve agents wll report ther postons wthn 11 The ncome comparsons lterature, whch focuses manly on the mpact of relatve ncome on subectve wellbeng, also employs geographcal defntons of reference groups (see the revew of Clark et al., 2008). 12 The correlatons n both panels of Fgure 5 also hold by localty. Where possble, ndcators aggregated at the geographcal level are based on neghborhoods rather than localtes to provde greater varaton n the fgures. 13 For nstance, f respondents to the survey smply provded a focal-pont answer (5 plus/mnus some random term) n reply to the queston on the perceved own-ncome rank, there should be no relatonshp between average ncome and average percepton by geographcal area. 15

18 ther reference groups as ther perceptons of ther ncome ranks wthn the whole populaton. On the other hand, under the null hypothess that ndvduals correctly apply Bayes rule, relatve ncome wthn a reference group should not have any explanatory power for perceved ncome rank wthn the populaton as a whole after controllng for the agent s obectve ncome rank. More specfcally, under the alternatve hypothess that ndvduals under-estmate the mportance of ncome n the formaton of reference groups, then the relatve ncome wthn the reference group wll be postvely correlated to ther perceptons of ncome rankng. 14 Table 2 presents a seres of tests of ths hypothess that employ regresson analyss. In all regressons, the perceved own-ncome decle s the dependent varable. 15 Column 1 presents a smple regresson wth the respondents obectve ncome decles as the sole ndependent varable. The results n ths column confrm the strongly sgnfcant relatonshp between the two varables dscussed above. The level of the coeffcent, however, reflects the dfferences n values between the two varables. Ths can be seen n Fgure 4a: n a perfect nformaton context, the obectve ncome varable should have a coeffcent of 1 and the regresson should have an r-square of 1. The estmate s strongly sgnfcant, but the coeffcent s only The second column repeats ths smple regresson, but ncludes 41 neghborhood fxed effects: 16 the coeffcent s slghtly lower, at about 0.201, and stll sgnfcant at the 1 percent level. The frst drect test of the geographc reference group hypothess s presented n column 3. The regresson ncludes the respondents ncome rank wthn ther localtes (the number of households wthn samplng ponts s too small to provde a meanngful measure), transformed to the 1-10 scale of the obectve and subectve ncome decle varables. Wth the ncluson of the localty rank varable as an ndependent varable, the coeffcent of the obectve ncome decle varable s vrtually zero, and not sgnfcant at standard levels. The coeffcent of the localty rank varable, on the other hand, has a postve and statstcally sgnfcant effect of on the perceved own-ncome decle. The respondents relatve ncomes wthn ther localtes thus seem to have an effect on ther perceptons of the dstrbuton, over and above that of ther own obectve ncome levels. The coeffcent s 14 However, n prncple t could also be the case that the ndvdual over-estmates the role of ncome n formng reference groups. If that was the case, then the relatve ncome wthn reference groups would be negatvely correlated to the perceptons of ncome rankng. 15 Regressons wth the bas as the dependent varable do not convey meanngful results because, by constructon, the bas s strongly correlated wth the obectve ncome decle. 16 Standard errors are clustered at the neghborhood level. All the results n the table are mantaned f 10 localty fxed effects (wth robust standard errors) are ncluded nstead. 16

19 economcally sgnfcant and s close to that of the obectve ncome level n the smple regressons of columns 1 and 2. Ths result does not arse from a hgh collnearty between obectve ncome and rank wthn localty, as shown by the regresson n column 4, whch ncludes obectve ncome decles as a seres of 9 dummy varables. Even wth ths semparametrc control for obectve ncome, the coeffcent of relatve ncome wthn a localty s statstcally sgnfcant and about the same n sze as n column 3, and the F-test reects the ont sgnfcance of the obectve ncome dummes wth a p-value of The followng column n Table 2 presents the results of another robustness check. A potental concern may be that the measure of obectve ncome s mprecse, so that the localty ncome rank varable may be ndrectly capturng the effects of unobserved varatons n actual ncome levels. The model n column 5 ncludes a set of addtonal regressors consstng of ndvdual and household characterstcs to proxy for the respondent s ncomegeneratng capacty (hs or her educaton level, that of hs or her spouse, age, gender, type of employment see the Table s notes for detals). If the localty rank captures some of the omtted varables, ts coeffcent should decrease substantally wth the ntroducton of these controls. The results shown n column 5 of Table 2 ndcate that addng ths exhaustve set of controls does not sgnfcantly alter the pont estmate or the statstcal sgnfcance of the coeffcent of the rank wthn localty varable, and these results are robust to the ncluson of further controls. Fnally, Table 2 also presents the results of a further test of the reference group hypothess. The survey ncluded a queston ntended to measure the breadth of respondents reference groups: Among your frends and co-workers, would you say that there are ndvduals from all socal classes (1), or, f not, that most of your frends belong to the lower class (2), the mddle class (3), or the upper class (4)? The response s used to generate a dummy varable that takes the value 1 f an ndvdual responded that hs or her frends are from all socal classes (38.5 percent of the respondents), and zero otherwse. Intutvely, people that nteract n several reference groups must have more nformaton about the role of ncome n formng reference groups (or alternatvely, the selecton process s more salent to them, so they are less lkely to fal to consder Bayes rule). As a consequence, they should be less prone to report ther relatve poston wthn ther localty as an estmate of ther rankng n the entre dstrbuton. The regresson shown n column 6 ncludes the ndcator varable for havng frends from all socal classes, as well as an nteracton of ths ndcator wth the respondent s ncome rank wthn the localty. The coeffcent of ths nteracton should be negatve: condtonal on ther own obectve ncome level, these ndvduals should be less 17

20 nfluenced by the relatve ncome wthn ther reference group. 17 The results obtaned from ths test also support the reference group hypothess: the coeffcent of the nteracton term s negatve and both statstcally and economcally sgnfcant. The emprcal results shown n Sectons 4.1 and 4.2 are consstent wth the factors hghlghted n the dscusson n Secton 2. Systematc bases n subectve ncome dstrbutons are manfested here as devatons n the percepton of own-ncome rank. A sgnfcant percentage of poorer ndvduals place themselves n hgher postons, whle a sgnfcant proporton of rcher ndvduals thnk that they are closer to the medan than they really are. Moreover, the results confrm the salent role played by reference groups (proxed by area of resdence) n the formaton of subectve ncome dstrbutons. As predcted, there s a postve relatonshp between an ndvdual s percepton of ncome rankng and relatve poston wthn the ndvdual s area of resdence, over and above the effect of the ndvdual s obectve ncome level. Also n lne wth the predctons, ndvduals wth frends from heterogeneous socal backgrounds are less prone to be based by ther relatve rank n ther area of resdence. 4.3 Based perceptons and preferences for redstrbuton: expermental results The emprcal evdence presented so far llustrates the degree of bas n dstrbutonal perceptons, and the followng analyss assesses ther relevance for atttudes towards redstrbuton. Studyng the effect of dstrbutonal msperceptons on poltcal atttudes poses a sgnfcant dentfcaton challenge, snce preferences for redstrbuton are sgnfcantly correlated wth ncome levels (Alesna and Gulano, 2009), whch are n turn closely lnked to an ndvdual s perceved poston and the resultng bas, as llustrated by the results n Table 1 and Fgure 4. A smple analyss of poltcal atttudes by obectve and perceved level of ncome would thus be marred by ths spurous correlaton problem. Ths secton presents an orgnal emprcal test to determne whether these msperceptons may affect economc decson-makng. The test was desgned to overcome these dentfcaton dffcultes and to llustrate how msperceptons can have frst-order mplcatons for economc and poltcal processes through ther mpact on ndvduals atttudes towards redstrbuton and related polces. 17 In an extreme case, f ths varable ndcates that the respondent has full nformaton on the selecton process, then the coeffcent of the nteracton should be negatve and equal n absolute value to that of the geographcal relatve rank. 18

21 As descrbed n Secton 3, the survey ncluded a feld questonnare-experment: the ntervewer provded a randomly assgned group of respondents wth correct (.e., unbased) estmates of ther postons n the ncome dstrbuton based on ther responses. The ntervewer explctly ponted out the degree and drecton of the bas n each respondent s self-assessment (f any). The experment thus dentfes the causal effect of ths nformaton treatment on preferences for redstrbuton. Moreover, to the degree that the treatment manages to correct based dstrbutonal perceptons, 18 the results can be nterpreted as capturng evdence of the effect of msperceptons on poltcal atttudes. The focus n ths study s on atttudes towards a specfc set of polces rather than on general belefs about ustce and ncome redstrbuton. The polces under study consst of drect government transfers to the poor. These polces were especally mportant n the context of the populaton under study, snce the extenson of famly allowances (cash transfers whch were made only to formal-sector workers,.e., those wth hgher ncomes) to the poor was a controversal ssue n Argentna at the tme the survey was mplemented n March 2009, a few months before a natonal mdterm electon. Opposton poltcal partes, unons, academcs and non-governmental organzatons (ncludng the Catholc Church) campagned ntensvely for ths polcy measure, whch was fnally mplemented by the federal government n November 2009 (Cruces and Gasparn, 2010). The publc debate at the tme of the survey focused on ths specfc polcy measure and on the detals of ts coverage and mplementaton. Fnally, apart from ther salence n the poltcal debate, another advantage of studyng these polces s that government drect transfer programs can reach a substantal proporton of the populaton and can be farly accurately targeted to the poor (unlke most of Argentna s publc expendture; see Gasparn and Cruces, 2010). Ths mples that low-ncome respondents faced a sgnfcant probablty of beng drectly affected by polcy changes n ths area. 19 The questonnare was used to gather nformaton on relevant socoeconomc characterstcs of the respondents and ther households and on ther perceved and obectve 18 The nformaton treatment n ths context conssts of a reduced number of sentences concernng the ncome dstrbuton and a statement pontng out dscrepances. Ths s a substantally weaker treatment than that used n some other studes, such as the nformaton provded about taxes and benefts n Chetty and Saez (2009). The sgnfcant results presented n the followng pages are thus all the more remarkable, snce they stem from a relatvely lmted treatment. 19 The most recent experence was a well-targeted emergency program mplemented n 2002, whch covered 20 percent of the households n the country. The new famly allowances program reached the same level of coverage and targetng n 2010, a year after ts mplementaton (see Cruces and Gasparn, 2010, for a detaled account of both programs). The publc debate on socal polcy at the tme of the survey thus covered ssues that could potentally have a drect mpact on lower-ncome households. 19