Monday, November 1, 2010

About envy

Homo Ĺ“conomicus is greedy, but why? One explanation is that he is envious, and this makes him competitive, leading to the positive outcomes of market economies that we often tout.

Not so fast, says Boris Gershman. Envy can lead to alternative equilibria, some virtuous, some vicious. We are familiar with the virtuous ones, where people "keep up with the Joneses", and thus exert effort towards getting better. Too much effort in fact. But things can also go dramatically the other way, where the best endowed people restrain their efforts to prevent the destructive envy of the poor. This suboptimal effort is likely to occur when there is large inequality and poor property rights.

This last point is important. For example, Russia right after the fall of communism came almost to a standstill because many were envious of successful people in a very negative way. The successful ones later overcame this by hiring their own security forces, a very inefficient use of resources. And this gave the opportunity to organized crime to take hold. Another example can be found in many developing economies where successful members of a family are expected to contribute significantly to the family. This lowers incentives for effort considerably.

There is now a lot of talk of how the increasing inequality in incomes and wealth could have negative consequences. While this paper shows that inequality will get reduced, it comes at the cost of having the most efficient in the society providing less effort than they would be willing to provide otherwise. Gershman suggests this can be avoided by protecting this elite more.

1 comment:

Anonymous said...

Way to go, Boris!