Inequality, institutions and cooperation

Abstract

We examine the effects of randomly introduced economic inequality on voluntary cooperation and whether this relationship is influenced by the quality of local institutions, as proxied by corruption. We use representative data from a large-scale lab-in-the-field public goods experiment with over 1,300 participants across rural Vietnam. Our results show that inequality adversely affects aggregate contributions, and this is on account of high endowment individuals contributing a significantly smaller share than those with low endowments. This negative effect of inequality on cooperation is exacerbated in high corruption environments. We find that corruption leads to more pessimistic beliefs about others' contributions in heterogeneous groups, and this is an important mechanism explaining our results. In doing so, we highlight the indirect costs of corruption that are understudied in the literature. These findings have implications for public policies aimed at resolving local collective action problems.

The (negative) effects of inequality on Social Capital

“…(2013), Reuben and Riedl (2013) 7 , Markussen et al. (2021), and Martinangeli and Martinsson (2020) 8 . In Sadrieh and Verbon (2006) and Maurice et al.…”

“…7 In Reuben and Riedl (2013), in the absence of punishment, inequality does not further reduce cooperation because people converge to the free-riding equilibrium even without inequality. 8 Both Martinangeli and Martinsson (2020) and Markussen et al (2021) find that inequality reduces cooperation, though the effect is insignificant. 9 Ku and Salmon (2012) also find that inequality reduces effort provision in a labor market context, which has been interpreted to be detrimental for growth.…”

“…A few papers do not find negative consequences of inequality on cooperation, such as Sadrieh and Verbon (2006), Maurice et al (2013), Reuben and Riedl (2013) 7 , Markussen et al (2021), and Martinangeli and Martinsson (2020) 8 . In Sadrieh and Verbon (2006) and Maurice et al (2013), a positive contribution to public goods is the Nash equilibrium.…”

“…The decline in overall contribution to public goods under inequality stems from the fact that the rich's contribution in relative terms is not large enough to offset the decline in contribution by the poor (due to a smaller endowment), compared to the case without inequality. The rich fail to contribute a share that would sustain cooperation, even though in absolute terms, they often contribute at least the same as the poor and often more (Buckley & Croson, 2006; Cherry et al., 2005; Fung & Au, 2014; Hargreaves Heap et al., 2016; Hauser et al., 2021; Markussen et al., 2021). Reuben and Riedl (2013) show that when punishment is possible in public goods games, individuals enforce a norm of proportional contributions, which suggests that in absolute terms, the rich are expected to contribute more.…”

“…88Both Martinangeli and Martinsson (2020) and Markussen et al. (2021) find that inequality reduces cooperation, though the effect is insignificant.…”