Subjective Inequity Aversion: How Unfair Inequality Affects Subjective Well-Being

Abstract

This paper argues that `inequity aversion' can be understood as an emotional reaction to perceived injustice that arises from individuals’ comparisons of their own and others’ outcomes to a subjective fairness ideal. In particular, we assume that subjective perceptions of inequity and not objective deviations from equality are crucial to understanding how individuals react to inequality. The paper formalizes these insights by adapting the Fehr and Schmidt (1999) model of inequity aversion replacing the fairness frame of objective equality with subjectively perceived equity. We test this model using data from the European Social Survey 2018 analyzing the association between respondents' perceived fairness of own, top, and bottom incomes with subjective well-being and preferences for redistribution. Results from spline regressions with country-fixed effects indicate that perceived injustice of own and top incomes is positively related to individuals' subjective well-being. For the perceived injustice of bottom incomes, we find no substantive relationships with subjective well-being. Further analyses indicate a positive link between the perceived injustice of bottom and top incomes and preferences for redistribution. In sum, our results suggest that injustice perceived for oneself is connected to utility while perceived injustice of others is related to increased willingness to back redistributive policy proposals even if they are not in line with material self-interest.