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James Andreoni

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James Andreoni

What are people buying when they give money away? Is pure altruism possible? Who benefits from grants to charities and subsidies to givers? Is religious giving different? Which fundraising approaches ‘wok’, and is more charity always better? Questions like these make philanthropy and fundraising among the most dynamic research areas in economics today. This research review guides students and scholars from the time when giving was seen as ‘irrational’, to the present when economics has fully embraced the complex and fascinating challenges of understanding why self-interested people can be so unselfish.
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James Andreoni

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James Andreoni

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Friedrich L. Sell

In ‘Factor mobility and income distribution’, we find that capital owners will improve (deteriorate) their relative and absolute position in the North (South) in the aftermath of free labour migration. Moreover, the gains of capital owners in the North outweigh the losses of capital owners in the South. On the opposite side, owners of low and medium working qualification will deteriorate (improve) their absolute and relative position in the North (South). However, the losses for labour in the North fall short of the gains achieved by labour in the South. In the North, there is a clear indication of increasing inequality in the case of unskilled immigration and a strong rationale for the conjecture that skilled immigration reduces inequality. Globalization tends to equalize factor prices: on the one hand, domestic capital owners win more than foreign capital owners lose; on the other hand, domestic losses for labour are more pronounced than gains for labour in foreign countries. It seems that comparatively immobile factors of production, such as labour, lose during globalization, while more mobile factors of production, such as capital, win. In the case of rigid wages, the North will lose welfare, whereas the South still profits from the new division of labour in the world economy. Hence, rigid wages make autarky more profitable than free trade/free flow of capital goods in the North. Opposed to this, the South profits from rigid wages in the North and prefers globalization in comparison to autarky. We put forward a bargaining solution where firms compensate unions’ members for wage decreases (in conjunction with higher real interest rates) induced by the forces of globalization with better working conditions. There exists a political economy trade-off: while the free movement of factors of production serves to maximize income and the international competitiveness of the domestic economy, the lack of regulation for labour and capital flows puts into danger a socially acceptable labour’s share in national income. In contrast, the regulation of factors’ mobility (capital export controls, immigration laws) can help to better achieve the distributional goal, but have to be paid by losses in allocative efficiency and hence in output units.
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Friedrich L. Sell

In ‘Final remarks’, we first test for the (in-)effectiveness of redistribution policies taking the case of Germany. One result for the period between 2001 and 2011 is that the correlation between the two distinct Gini coefficients turns out to be quite significant. This is a clear sign that the government was unable to implement effective redistribution policies. Opposed to this insight, the period 1991–2000 reveals no significant correlation between the two distinct concepts of the Gini coefficient, a result that we take as a strong indicator for some sort of policy effectiveness in the field of redistribution. In the remainder of the chapter, we concentrate on the concept of ‘equity aversion’ and demonstrate with the help of three examples how this type of social preference can inspire the economics of distribution and of redistribution.
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Friedrich L. Sell

In ‘Income distribution and economic growth’, we describe the interaction between innovators (advancing prey) and pursuing imitators (pursuing hunters). Imitators are given the role of ensuring that the (new) technological knowledge created by innovators is being diffused. Innovators see to it that their own production methods are more cost-effective, thus causing a profit disparity among vendors. This attracts imitators onto the market whose investments cause the new knowledge to be diffused while also triggering an erosion of the profit disparity that existed before. However, with the disappearance of ‘difference profits’, real investment decreases too, and financial investment becomes more attractive. If difference profits increase again due to the occurrence of autonomous technological progress, profit dispersion will, as a result, increase again. The system moves towards a point where a minimum in the real investment quota is reached. From there on, the investment quota will increase again as a result of high pioneer profits and increases in dispersion of profits. We demonstrate possible bargaining equilibria between unions and firms – which have contradictory views on benefits and costs of a high rate of wage increases/a high dispersion of wage increases. We present a social optimization model in which income distribution and economic growth are jointly determined in political equilibrium. Both a quite equal as well as an extremely unequal distribution of personal incomes are of disadvantage to economic growth. In the empirical test of our approach, we first identify the Kuznets curve. Thereafter, we look for conditional convergence among ‘rich countries’ and conditional divergence for ‘poor countries’. Hence, our empirical findings support the hypothesis of a non-linear relationship between the Gini coefficients, on the one hand, and the per capita real growth rates of income, on the other hand.
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Friedrich L. Sell

In ‘Income distribution and the business cycle’, two-class models in the vein of Nicholas Kaldor serve to establish some benchmark results. In a three classes society, the middle class plays an essential role. Contrary to some conventional wisdom, a decrease in inequality might even increase the average propensity to save. Income redistribution during the cycle will affect more the lower and the upper incomes than the middle income class. As income distribution changes in favour of lower (upper) income groups during the downswing (upswing), the behaviour of the middle class will be dominated by a ‘keeping ahead of the Smiths’ attitude in the case of a downswing and by a ‘keeping up with the Joneses’ attitude in the case of an upswing. This is also a signal for the existence of equity aversion as a social preference. In our political economy model of a currency union, there exists a trade-off between unemployment and the concentration of incomes. For governments in a currency union, an optimal strategy is to reduce unemployment to a lower level by election day and to accept a more unequal distribution of incomes. As soon as there are expectations of a more equal distribution, the government loses its majority. During the election period, the government will intend to dampen expectations of a more even income distribution. This is possible by means of a policy of fiscal contraction (such as heavy taxation of leading consumers) that will be associated with rising levels of unemployment. Immediately before the election day, the government distributes its ‘presents’ to leading consumers and thus succeeds in pushing demand and reaching an optimal point for re-election again.
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Friedrich L. Sell

In ‘Income distribution and the capital market’, we replicate a long-standing insight: economic growth in conjunction with stable prices tends to reduce the distributional conflict between savers and investors. We also show how the Target2 mechanism made it possible to shift purchasing power in the Eurozone during the years 2008–12 from the GANL (Germany, Austria, Netherlands, Luxembourg) countries to the so-called GIIPS (Greece, Italy, Ireland, Portugal, Spain) countries, financed by a money-printing process and substituting regular capital flows. In a comprehensive static welfare evaluation of Target2, we find overall net welfare gains for the GIIPS countries. In contrast, the GLNF countries (Germany, Luxembourg, Netherlands, Finland) suffer from net welfare losses due to the Target2 mechanism. The analysis of bargaining in the credit market reveals that mutual cooperation is not a Nash equilibrium. Therefore, only banking supervision is capable of enforcing fair contracts in the credit market. In the political economy section of the chapter, we go beyond the irrelevance theorem of Modigliani-Miller: firms quoted at the stock exchange have to face the alternatives of payout policies vis-à-vis retention policies. There are good reasons to assume that small (large) shareholders have a preference for payout over retention policies: stabilizing dividend payments to become a foreseeable stream of income helps the small stockholders to smooth their consumption expenditures. Our own empirical analysis for Germany (1991–2010) supports the view that stock market quoted firms tend to plan payouts so that retentions – given the pitfalls of the business cycle – are to a large extent a mere residual.
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Friedrich L. Sell

The chapter on ‘Income distribution and the labour market’ addresses firstly the issue of minimum wages and of efficiency wages. We show that minimum wages induce unemployment among unskilled workers. Moreover, we demonstrate that minimum wages for unskilled labour are an inappropriate policy instrument to change income distribution in favour of unskilled workers. We call this the ‘irrelevance theorem of minimum wages’. The distributional impact of efficiency wages is twofold: on the one hand, they tend to increase the inequality between the employed and the unemployed part of the labour force. On the other hand, efficiency wages are capable of diminishing the gap between wage earners and capital income earners. It is not yet clear whether there exists a stable trade-off between unemployment and overall inequality: the impression is that the USA (Europe) can pay the price for higher inequality of incomes (unemployment) with lower unemployment (inequality of incomes). Frequently, workers with different skill levels are represented by the same union; unions, however, have a tendency to reduce the spread of wages during negotiations with employers in comparison to a situation where each employee is paid according to their marginal productivity. It is important to have a considerable skewness in the distribution of wages if the goals pursued by the unions consist in raising the average wage rate and the total wage sum. If unions want to limit, at the same time, the size of wage dispersion, a classical ‘trade-off’ appears.