Preference reversals and the analysis of income distributions

It is known from the literature on uncertainty that in cases where individuals express a preference for a high win-probability bet over a bet with high winnings they nevertheless will bid more to obtain the bet with high winnings. We investigate whether a similar phenomenon applies in the parallel social-choice situation. Here decisions are to be made between a distribution with a large group of high-income people and a distribution with a small group of very high-income people. Results from a number of experimental designs are analysed. We are grateful for helpful comments from three referees of this journal, Peter Dolton, Graham Loomes, Dirk Van der gaer and seminar participants at the LSE and the University of Gent. We also thank Guillermo Cruces for computational assistance.

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