Co-Authors: Marco Fongoni, Sofie R. Waltl, Nikola Kilzer, Jasper Hepp

This article provides new laboratory evidence on the interplay between social comparison, procedural fairness and employees’ morale and effort. We propose a new design which enables us to: i) isolate the effect of wage inequality on effort from other confounding factors that are present in previous experiments, such as piece-rate incentives or gift-exchange; ii) understand the mediating role of procedural fairness, that is, whether wage inequality based on merit is considered to be more acceptable by employees. We find that employees respond more strongly to disadvantageous wage inequality by decreasing their effort relative to their high-paid peers, and that the strength of this response is correlated with loss aversion. However, we also find that if wage inequality is the outcome of ex ante differences in employees’ ability (i.e., it is justified), its effect on morale and effort disappear. We conclude that transparency and fair procedures can help mediate the adverse effect of wage inequality in the workplace.

Co-Author: Juan Carlos Escanciano

Equality of opportunity has emerged as an important ideal of distributive justice. Empirically, Inequality of Opportunity (IOp) is measured in two steps: first, an outcome (e.g., income) is predicted given individual circumstances; and second, an inequality index (e.g., Gini) of the predictions is computed. Machine Learning (ML) methods are tremendously useful in the first step. However, they can cause sizable biases in IOp since the bias-variance trade-off allows the bias to creep in the second step. We propose a simple debiased IOp estimator robust to such ML biases and provide the first valid inferential theory for IOp. We demonstrate improved performance in simulations and report the first unbiased measures of income IOp in Europe. Mother’s education and father’s occupation are the circumstances that explain the most. Plug-in estimators are very sensitive to the ML algorithm, while debiased IOp estimators are robust. These results are extended to a general U-statistics setting.

TBA

Should governements tax different assets at different rates? The answer depends crucially on the cross-elasticities between asset classes, of which few estimates exist. This paper estimates the cross-elasticity between the two main components of household wealth: financial and real estate assets. In 2017, France transformed its wealth tax into a real estate tax, thereby eliminating wealth taxation on financial assets. Using comprehensive linked administrative income and wealth data from France, I study the effect of this unique reform by contrasting the responses of French residents to non-residents, who remained subject to the wealth tax but were unaffected by the reform. Five years after the reform, French taxpayers have reallocated on average 5% of their real estate holdings toward financial assets. These responses translate into a quite modest cross-elasticity: a one percentage point differential increase in the tax rate on real estate causes taxpayers to reallocate 4.7% of their real estate assets to financial assets. This reallocation is driven by reduced ownership in investment properties rather than owner-occupied housing, and coincides with a surge in dividend incomes. Overall, I estimate that behavioral responses account for approximately 7% of the revenue loss due the reform, indicating that the mechanical impact dominates. These findings have two key implications. First, from an equity perspective, exempting financial assets from wealth taxation primarily served as a tax cut for wealthy households in France. Second, the efficiency cost of taxing real estate more heavily than other assets appears limited.

Co-Authors: Alice Kügler and Uta Schönberg

We investigate the consequences of structural change for workers displaced from the manufacturingsector. Manufacturing establishments traditionally employed low- and high-wage workers in similarproportions and paid substantial wage premiums to both types of workers. Structural change has ledto the disappearance of these jobs, particularly for low-wage workers. Decomposing displacementwage losses, we show that low-wage workers suffer considerable losses in establishment premiumsfollowing displacement, whereas high-wage workers tend to fall down the match quality ladder. Withongoing structural change, losses in wages and establishment premiums have increased over time,especially for low-wage workers, in part because they are increasingly forced to switch to low-knowledge service jobs where establishment premiums are low. Our findings further highlight thatstructural change and layoffs in manufacturing have significantly contributed to job polarization andthe rise in assortative matching of workers to firms.