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Inequality and Growth: Conflict or Convergence? 137

IS PERFECT EQUALITY OPTIMAL?

4.12 Having established that inequality and income per capita do not diverge in their relationship
with socio-economic outcomes in India, now it is worth asking : is perfect equality optimal? In
most cases, inequality of opportunity is much more objectionable than inequality of outcomes,
as individuals' opportunities are influenced by endowments that are related to parents and other
adults, peers, and a variety of chance occurrences throughout their lifetimes.

4.13 Note that perfect equalisation of outcomes ex-post, i.e., after the efforts have been exerted
to obtain those outcomes, can reduce individuals’ incentives for work, innovation and wealth
creation. A benevolent social planner seeks to maximize aggregate welfare: an economy in
which each individual possesses 2 units of wealth is preferable to one in which each individual
possesses only 1 unit of wealth. This is true even if the planner assigns greater weight to the poor
than the rich, i.e., the planner’s social welfare function depends on not just the size of the pie but
also how it is distributed.

4.14 In sum, for a developing country such as India, where the growth potential is high and
the scope for poverty reduction is also significant, a policy that lifts the poor out of poverty
by expanding the overall pie is preferable as redistribution is only feasible if the size of the
economic pie grows rapidly.

Box 2: How do people view inequality: Fairness, self-interest and morality

Do people aspire for a perfectly equal society? Experimental evidence suggests that this idea is
surprisingly uncertain. Norton and Ariely (2011) conducted a study in the U.S. where participants
were shown three pie charts picturing the wealth distribution of hypothetical countries: a perfectly
equal one, one with moderate levels of inequality (inspired by Sweden) and an unequal one
(representing the U.S.). Most participants chose the second option as the nation they preferred to
live in, thus expressing their desire for some inequality. Moreover, when describing their ideal world,
they reportedly wished for the richest quintile of the U.S. to own about 32 per cent of total wealth,
more than three times the wealth they wished for the poorest quintile. It appears that even when
imagining an ideal world, people aim for social stratification. This phenomenon manifests when the
subjects are asked not only about distribution of income, but also wealth and CEO-worker pay gaps.
Kiatpongsan and Norton (2014) show that Americans wish for a ratio of 7:1 in CEO-worker pay gaps
so that a CEO should ideally earn $7 for every $1 earned by a factory worker . Ironically, what leads
4
people to choose a moderate level of inequality is their sense of fairness reflected in the idea that
people with certain inherent characteristics and abilities deserve more than others.

However, inequality in reality is far worse that what people desire. Yet, why does it persist in a
democratic polity? If people were made more aware about the reality of where they stand in the
income ladder, would that generate a societal preference for redistribution to reduce inequality?
Hauser et al. (2016) study this question in the U.S. in groups of five participants who played a public
goods game. Players in the game were assigned an ‘income’ reflecting each quintile in the U.S. Then,
participants contributed to a common pool and were given the possibility to punish and reward fellow

4 Kiatpongsan S, Norton M. 2014. How much (more) should CEOs make? A universal desire for more equal pay.
Perspectives on Psychological Science; 9(6): p. 587-593