Inequality aversion is a concept in behavioural economics. It means humans have a notion of fairness and will reject what they consider as inequalities. This psychology is responsible for individuals refraining from targeting higher rewards if they perceive another party getting better incentives. We have seen this in the centipede game.
Kahneman et al. report results from their study in which they carried out telephonic surveys on the residents of Toronto and Vancouver. Each participant got a maximum of five questions regarding fairness in a telephonic interview.
Question 1
“A hardware store has been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price to $20. Please rate this action.” 80% of the respondents thought it was unfair.
Question 2
Question 2 has two parts. 2A: An employee is working in a photocopying shop at a wage of $9/hour. Upon seeing unemployment rising in that area and noticing other smaller shops paying $7/hour for their employees, the owner reduces the employee’s wages to $7/hour.
2B: An employee is working as in question 2A. After she leaves, the employer recruits a new person at a wage of $7/hour.
To question 2A, 83% of the respondents replied as unfair, and to 2B, only 27%.
House on rent
Similar ideas of fairness exist in residential tenancy. Different rules of rent-hikes are accepted for a new tenant (higher tolerated) vs a tenant renewing the lease (lower). At the same time, people thought it was ok if the landlord sold the house and the new owner charged higher rent from the existing tenant!
Reference
Daniel Kahneman, Jack L. Knetsch and Richard Thaler: Fairness as a Constraint on Profit Seeking: Entitlements in the Market, The American Economic Review, 1986, 76(4), 728
