Which Inequality? The Inequality of Endowments Versus the Inequality of Rewards

Society often allocates valuable resources - such as prestigious positions, salaries, or marriage partners - via tournament-like institutions. In such situations, inequality affects incentives to compete and hence has a direct effect on equilibrium choices and hence material outcomes. We introduce a new distinction between inequality in initial endowments (e.g. ability, inherited wealth) and inequality of what one can obtain as rewards (e.g. prestigious positions, money). We show that these two types of inequality have opposing effects on equilibrium behavior and wellbeing. Greater inequality of rewards tends to hurt most people — both the middle class and the poor, — who are forced into greater effort. In contrast, greater inequality of endowments tends to benefit the middle class. Thus, which type of inequality is considered hugely affects the correctness of our intuitions about the implications of inequality.

A comparison of results from MRIO and interregional computable general equilibrium (CGE) analyses of the impacts of a positive demand shock on the ‘CO2 trade balance’ between Scotland and the rest of the UK

In previous work we have applied the environmental multi-region input-output (MRIO) method proposed by Turner et al (2007) to examine the ‘CO2 trade balance’ between Scotland and the Rest of the UK. In McGregor et al (2008) we construct an interregional economy-environment input-output (IO) and social accounting matrix (SAM) framework that allows us to investigate methods of attributing responsibility for pollution generation in the UK at the regional level. This facilitates analysis of the nature and significance of environmental spillovers and the existence of an environmental ‘trade balance’ between regions. While the existence of significant data problems mean that the quantitative results of this study should be regarded as provisional, we argue that the use of such a framework allows us to begin to consider questions such as the extent to which a devolved authority like the Scottish Parliament can and should be responsible for contributing to national targets for reductions in emissions levels (e.g. the UK commitment to the Kyoto Protocol) when it is limited in the way it can control emissions, particularly with respect to changes in demand elsewhere in the UK. However, while such analysis is useful in terms of accounting for pollution flows in the single time period that the accounts relate to, it is limited when the focus is on modelling the impacts of any marginal change in activity. This is because a conventional demand-driven IO model assumes an entirely passive supply-side in the economy (i.e. all supply is infinitely elastic) and is further restricted by the assumption of universal Leontief (fixed proportions) technology implied by the use of the A and multiplier matrices. In this paper we argue that where analysis of marginal changes in activity is required, a more flexible interregional computable general equilibrium approach that models behavioural relationships in a more realistic and theory-consistent manner, is more appropriate and informative. To illustrate our analysis, we compare the results of introducing a positive demand stimulus in the UK economy using both IO and CGE interregional models of Scotland and the rest of the UK. In the case of the latter, we demonstrate how more theory consistent modelling of both demand and supply side behaviour at the regional and national levels affect model results, including the impact on the interregional CO2 ‘trade balance’.