Promoting Competition or Helping the Less Endowed? Distributional Preferences and Collective Institutional Choices under Intra-Group Inequality

Unequally-distributed resources, whether people’s income or competence, are ubiquitous in our real world. Whether to promote competition or to lead to a more equal environment is often in question in societies or organizations. With heterogeneous endowments, we let subjects collectively choose whether to have a competitive lottery contest - where only one individual in a group wins and receives an award, generating a greater income inequality - or to have a public good that benefits the less-endowed to a greater degree. Our data indicates that highly-endowed individuals contribute little when the public good is selected. The majority of subjects, however, vote in favor of having a public good, contrary to the standard theory predictions. In addition, a belief elicitation task shows that they expect payoffs to be more equally distributed under the public good regime than under the contest regime. Moreover, the subjects’ preferences between the two regimes are little affected by their risk attitudes or the size of awards in competition. These suggest that people’s institutional choices are driven more by their income inequality-averse preferences.