TY  - JOUR
AU  - Rosen,Sherwin
TI  - Manufactured Inequality
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5846
PY  - 1996
Y2  - December 1996
UR  - http://www.nber.org/papers/w5846
L1  - http://www.nber.org/papers/w5846.pdf
N1  - Author contact info:
Sherwin Rosen
Department of Economics University of Chicago
1126 East 59th Street
Chicago, IL   60637
Tel: 312-702-8166
AB  - Many discrete life choices--where to live, what kind of job to hold, and consumption lifestyle--are stratified by income. Stratification and sorting often manifest state-dependent preferences in which the marginal utility of income (consumption) depends on the outcome of prior choices.  For example, one can choose to live a quiet life in the country, where money buys few things, or can choose a more active and exciting lifestyle in a large city, where money has greater value because all kinds of goods are available to buy.  The natural market equilibrium stratification is for rich people to live in the city, where their money has more value, and for poor people to live in the country, where money is less productive.  But before location is chosen, the a priori von Neuman-Morgenstern utility function over both choices can take the Friedman-Savage form, providing pareto efficient social demands for inequality.  If there is not enough inequality to produce the socially optimum stratification to begin with, inequality is socially manufactured.  People voluntarily participate in gambles and lotteries in which the winners are rich and live in the exciting places and the losers are poor and choose the quiet life.  There is a inequality.
ER  -