Recent elections, G20 summits, and CEO pay scandals have brought inequality to the forefront of the news. Economists often point out that decisions on, say, tax policy in this arena depend on society’s – and individuals’ – attitudes to inequality and fairness. But how you feel about a given inequality depends on how it affects you. Behavioural economics has traditionally examined two perspectives: stakeholders who are directly affected and spectators who view the issue impartially. While research has shown how people react to injustices they experience, studies of spectators reveal how people’s principles drive their support for inequality-mitigating actions.
However, a third perspective has been largely overlooked: the consumer who is informed about the inequality involved in the production and creation of goods they might buy. They aren’t directly involved, but they aren’t completely disconnected either. These consumers are in a unique position to “subscribe” to the inequality – or not.
Standard economic theory assumes consumers are indifferent to the inequality associated with products. Arguments against inequality-reducing policies often suggest that such measures would harm consumers through higher prices – presuming cost is all that matters to buyers. But new research suggests otherwise: when informed of the inequality associated with each product on offer, a significant majority of consumers – around 80% in England and the U.S. – are willing to pay a premium for products with less extreme inequality.
Consumers care about fairness
Our research, based on a behavioural experiment involving representative samples from England and the U.S., tested how inequality information affects consumer choices. Participants were shown the price and inequality associated with two comparable household products and were invited to buy one. Even when subjects believed high salaries were justified, they were willing to pay more for goods tied to more moderate levels of inequality. This indicates that while fairness can justify some disparities, most people draw the line at extreme inequality.
Interestingly, the willingness to pay for reduced inequality spans the political spectrum. The difference lies in how much people are willing to pay for specific reductions. Right-leaning consumers will pay to address only very high (but not unrealistic) inequality, while left-leaning consumers are willing to pay for reductions further down the scale.
People’s consumption behaviour are better explained by their views on whether there is too much inequality in their country than by their preferences for income redistribution. National and international surveys show that opinions on redistribution vary, but many agree that current inequality levels are too high. This consensus could explain why 80% of consumers are ready to pay more for products with less inequality, even though fewer than half support redistribution policies that directly address inequality.
Mobilising consumer attitudes to tackle inequality
Our findings suggest an information-based, consumer-oriented policy could help address inequality at a societal level – and do so with more public buy-in than traditional measures. The key is ensuring that consumers have access to clear information about the inequality involved in producing each good.
Firstly, the experiment underlines the importance of providing inequality information for all products. Decades of psychological research has shown that people are more motivated to avoid negative products than they are to seek out positive ones. However, current social labels like Fairtrade are voluntary and mainly highlight “virtuous” products. A universal system that identifies “poor-performing” products would be far more effective.
Secondly, comparing various inequality indices, including the Gini index favoured by economists, a five-point scale akin to the Nutri-Score, and the ratio between maximum and median wages within companies, we find that the latter is generally perceived as the most comprehensible and informative, and elicits higher willingness to pay from consumers. It’s also the index that publicly listed companies in the United States, the UK, and the EU are now required to disclose. Governments already collect much of the necessary data to calculate this index for all companies. All that’s needed is to make it accessible to the public, either for individual products or by product and producer type.
A practical policy could involve publishing general inequality indicators by product and producer type, which consumers may access through mobile apps similar to those used for nutritional information. A company’s own inequality data can be provided to consumers when they disclose it; for others, the relevant public general indicator can be used instead. Given current misperceptions about inequality levels, such baseline data will typically influence purchasing behaviour. It will also provide an incentive for “well-performing” firms to disclose their inequality data, hence making it easier for consumers to identify the “poor-performing” products.
Shifting our focus from merely observing inequality to understanding how our buying choices can be guided by it opens up new ways to address the issue. This approach, based on informing consumers, may engage the public more effectively than traditional policies. It requires only minimal regulation, guided by insights from behavioural research.
The research cited in this article was supported by the Agence Nationale de la Recherche (ANR) and the Fondation HEC Paris.
This article was originally published on The Conversation. Read the original article.
