Income Inequality and Subjective Well-Being: Assessing the Relationship

[We’re pleased to welcome author Ivana Katic of the Yale School of Management.  Katic recently published an article in Business & Society entitled, “Income Inequality and Subjective Well-Being: Toward an Understanding of the Relationship and Its Mechanisms,” co-authored by Paul Ingram of Columbia Business School. Below, Katic details the inspiration for the study:]

What inspired you to be interested in this topic? Inequality has always been a major topic in sociology. In the academic community and beyond, this interest in inequality simply exploded in the wake of the financial crisis of 2008, as well as the Occupy protests around the world. Despite the amount of attention that income inequality has been receiving in empirical studies across psychology, sociology, economics as well as political science, my co-author Paul Ingram and I noticed that the literature was still quite mixed in regards to the effects of income inequality. In fact, extant studies had found positive, negative and neutral effects of income inequality on the subjective wellbeing and happiness levels of individuals. This lack of a consensus, we thought, was quite interesting, especially in contrast to the commonly held belief that inequality has exclusively negative consequences for individuals, as well as communities—ranging from lowered trust and health and increased crime levels to, ultimately, lower overall wellbeing. We decided that the time was ripe to pursue a comprehensive study that would allow us to better understand how income inequality affects subjective wellbeing (SWB). Such a study would also allow us to better understand the channels through which income inequality may affect SWB. We set out to answer these important, and particularly timely questions, by constructing a rich cross-country dataset including 65 countries from 1995 to 201B&S_72ppiRGB_powerpoint.jpg1.

Were there findings that were surprising to you?Given the common notion that income inequality is always detrimental to human flourishing, we were initially surprised to see that income inequality had a strong and very robust effect on SWB in our analysis. On the other hand, this was not the first time a study had found a positive effect—so there was clearly precedent for our finding in previous literature on the topic. However, to be quite certain, we threw everything we could at our results in a variety of robustness tests (including different operationalizations of our key independent variable and our dependent variable, as well as a series of different estimation techniques). Our results never budged.

How might one use the study’s main finding of a positive main effect of income inequality on SWB to create policy? While our main effect suggests that decreasing income inequality may not increase SWB, we caution against using our study as justification for lowering taxes and increasing inequality. First, our results do not necessarily indicate that income inequality is never a negative for a variety of other life outcomes. Second, we cannot rule out that income inequality may increase beyond the range studied in our paper, and we similarly cannot guarantee that it would not have negative effects beyond that range. Third, in a separate working paper, we find that any changes in the level of income inequality are uniquely damaging to SWB, suggesting that fluctuating levels of inequality may be particularly psychologically taxing for individuals to adjust to.

However, our study has another way forward for policy. A particularly important aspect of our study is that it sheds light on the mechanisms of income inequality’s relationship with SWB. Specifically, we found that income inequality has more positive effects on individuals who are relatively better off, those that perceive the income generation process to be fair, and surprisingly, those that do not perceive a lot of social mobility in their society. It is with these mechanisms in mind that we suggest constructing policies that focus on increasing perceptions of fairness and reducing social comparisons to the superrich.

In terms of future research, we hope that our study paves the way for other work that might further unravel the complexity of income inequality’s effects. In particular, future scholars should continue to investigate how income inequality may impact individuals differently depending on who they are, and where they live. Finally, the role of organizations in affecting levels of income inequality (and consequently, SWB) is also a very promising area of study. Given the complexity of this social phenomenon, as well as its highly significant implications for policy, future work on all of these topics is direly needed.

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The Tragedy of Modern Economic Growth

3404903571_07e490e4fd_z.jpgH. Thomas Johnson, a long standing accounting historian, reflects on how current business practices, which predominantly utilise accounting as their language, are hastening the planet’s decline. His latest article, “The tragedy of modern economic growth: A call to business to radically change its purpose and practices,” is recently published in Accounting History, and is currently free to read.

Johnson argues that modern growth-oriented economies consume resources at a rate faster than the Earth’s ecosystems can presently regenerate, threatening the sustainability of all life. Johnson elucidates how fundamentally new thinking is required to change business practices in ways that protect the Earth. As a solution, this article proposes that the tangible ecological principles that underpin Earth’s life-restorative natural ecosystems provide a more suitable language for materialising a sustainable human economy than the abstract language drawn from accounting and finance.

Click here to access the article. 

Hope/economy photo attributed to Simon King (CC).

Call for Papers: Financial Markets and the Transition to a Low-Carbon Economy

                                                          Call for Papers
OrO&E_Mar_2013_vol26_no1_72ppiRGB_powerpoint.jpgganization & Environment- Special Issue
Financial Markets and the Transition to a Low-Carbon Economy

Submissions Due: April 28, 2017

Guest Editors
Céline Louche, Audencia Business School
Timo Busch, University of Hamburg
Patricia Crifo, University Paris X, Ecole Polytechnique
Alfred Marcus, Carlson School of Management, University of Minnesota

 

This special issue of Organization & Environment seeks to advance an emerging field of research on the financial sector and the transition to a low-carbon economy.

The COP 21 in November 2015 in Paris has intensified the reciprocal influences between the financial world and issues around climate change. Even the 2°C threshold has been discussed, and it is now acknowledged that “efforts [should be pursued] to limit the temperature increase to 1.5°C above pre-industrial levels” (UNFCCC, 2015). One of the main efforts consists in a cumulative investment of $53 trillion in energy supply and energy efficiency over the period from 2014 to 2035 (International Energy Agency, 2014). This consists not only in a shift from fossil fuels to renewable energy investments but also in much more investments in energy efficiency.

If the objectives in terms of carbon emissions and technologies deployment to keep the global average rise in temperature below 2°C are well defined (International Energy Agency, 2014; Meinshausen et al., 2009)—even if some space remains for alternative scenarios regarding specific technologies like Nuclear or Carbon Capture and Storage—the process to get there is not yet clear.

Governments can stimulate these changes notably through regulations. However, governmental actions might represent a long and cumbersome process. One may also question the feasibility to see widespread and significant actions from policy makers, which might not be enough to meet the ambitious climate objectives. If strong climate change–related regulatory actions seems to be emerging, investors already face substantial financial risks to see their assets become stranded in the context of a transition to a low-carbon economy (Ansar, Caldecott, & Tilbury, 2013; Leaton, 2013). This already calls for new ways of integrating climate change–related financial risk for investors.

If immediate and effective action cannot be expected to come from policy makers, financial markets could step in and play a significant role in the transition to a low-carbon economy. Indeed, they have the ability to massively redirect capital toward players that positively contribute to a climate-resilient economy, be it through dedicated financial instruments or the allocation choices investors make. Many indicators show that there is already a strong interaction between financial markets and the issues around climate change. Voluntary initiatives have emerged from the financial sector, like the Montreal Pledge or the Portfolio Decarbonization Coalition. New institutions addressing the need for climate-related data have emerged like CDP (Carbon Disclosure Project) and divestment or divest/invest campaigns such as the Fossil Free Campaign lead by 350.org. Financial services providers are also starting to handle the question by designing so-called “low-carbon” or “carbon-efficient” financial products. The regulatory body is also acknowledging the potential role of the financial market. As an illustration, in May 2015, France passed a new law—the French legislation on climate reporting for investors1—requiring mandatory ESG and climate policy reporting to all asset owners on a “comply or explain” basis. Another example is the Financial Stability Board’s Climate Disclosure Taskforce founded by Michael Bloomberg, whose objective is to give recommendations on what and how information should be disclosed by companies to better inform investors, lenders, and insurers about climate-related financial risk (Task Force on Climate-Related Financial Disclosures, 2016).

With or without regulation, the financial markets will play a crucial role in the transition toward the low-carbon society of the future. In addition to disclosure and portfolio adjustment issues, the financial sector can drive all other sectors’ transitions by discriminating the access to funding in the banking, insurance, and capital markets as a function of firms’ sustainability performance. However, the lack of research in this area is prevalent and many questions remain to be explored. Given the urgency of the climate change problem, further contributions in this area are both timely and needed.

Despite many initiatives to assess the performance of corporates regarding climate change, it appears that it is still extremely difficult to assess the contribution of a financial portfolio or an investment strategy to the energy transition. The indicators available to measure the alignment of the financial sector with those needs are far from clear and harmonized. Some work has already been done on the potential roles the financial sector can play for sustainability (Busch, Bauer, & Orlitzky, 2015) and on the ability of a given investment strategy to “hedge against climate risk” based on lower scopes 1 and 2 carbon intensity (Andersson, Bolton, & Samama, 2014; Schoenmaker & van Tilburg, 2016). Also, there is very little research on the potential contribution of financing streams to climate change mitigation and the transition to a low-carbon economy.

This Special Issue therefore addresses the variety of ways in which financial markets are already paving this way ahead and could or should do in future. Contributions to the Special Issue may cover (but are not limited to) the following research questions:

  • Which are the key stakeholders in the financial industry`s value chain for fostering a low-carbon economy? What are their barriers/motivations for accelerated action?
  • What is the potential leverage of different asset classes for financing of the energy transition?
  • What is the impact of current low-carbon investment practices regarding their contribution to climate change mitigation? Which challenges remain?
  • Which new institutions are required/likely to emerge for fostering the energy transition through financial markets?
  • What is the capacity of nonregularity initiatives like CDP or divesting movement in influencing the financial markets to engage in the transition to a low-carbon economy?
  • What is the financial relevance of climate effective investment strategies? Can current assessment tools fully capture related risks?
  • Are long-term climate goals coherent with short-term and/or long-term financial strategies?
  • What are the main drivers for low-carbon strategies in financial markets: regulatory pressure, underestimated risks, underestimated opportunities, and/or new social movements?
  • What are emerging practices in low-carbon finance, including the suitability and inclusivity of methodologies, tools, and metrics? What theories are emerging from those emerging practices?
  • What are the behavioral impediments of investors, asset managers, investor advisers, and other financial market actors to the development and adoption of low-carbon investment practices?
  • What are the enabling and hindering factors influencing financial institutions’ capacity to change and adapt their portfolio allocations, as well as their internal decision processes leading to pricing and capital access choices related to clients’ environmental performance?
  • Authors should submit their full manuscripts through ScholarOne Manuscripts by April 28, 2017, through http://mc.manuscriptcentral.com/oe
  • Be sure to specify in the cover letter document that the manuscript is for the special issue on “Financial Markets and the Transition to a Low-Carbon Economy.”
  • Manuscripts should be prepared following the Organization & Environment author guidelines, available at http://oae.sagepub.com/
  • After an initial screening by the guest editors, all articles will be subject to double-blind peer reviewing by a minimum of two anonymous referees and editorial process in accordance with the policies of Organization & Environment.
  • Authors who are invited to revise and resubmit their papers will be invited for a manuscript development workshop (expected date and location: Fall 2017, Paris). Acceptance for presentation at the workshop does not guarantee acceptance of the paper for publication in Organization & Environment.

Please click here to view this in full-text format, along with references.

How to turn a Cinderella product into a market queen

[The following post is re-blogged from the London School of Economics and Political Science Business Review. Click here to view the article from LSE. It is based on a paper recently published in Administrative Science Quarterly titled “How Cinderella Became a Queen: Theorizing Radical Status Change.“From LSE:]

The case of Italian grappa shows that more than marketing is needed to raise a product’s market status, write Giuseppe Delmestri and Royston Greenwood

Quality, we know, is often necessary, but it’s far from a sufficient condition for market status. Better technologies lose format wars — as Betamax did against the inferior VHS videotape in the 1980s, and as artisanal bakeries did to industrial mass producers.

Losing status, however, is much easier than gaining it. Ask law firms, accounting firms, even universities how they might break into the elite status group within their industry, and there is typically no response. Turning low into high status is profoundly difficult — irrespective of quality, and especially if the starting point is from the base of the market status pyramid.

In the case we discuss below — Italian grappa — several attempts by entrepreneurs to improve the status of grappa and of their artisanal production methods resulted in failures and even bankruptcy — even though the quality of the product was superb. But Italian grappa did achieve the dramatic status move from the bottom to the top of the status ladder. It rose from a plebeian underdog of whisky and cognac to become a lifestyle product served at eminent social gatherings and offered by starred restaurants. How did this happen?

Until the 1970s, Italian grappa was considered a cheap, almost stigmatized beverage consumed at the margin of society and as being only appropriate for workers, peasants and alpine soldiers. It was associated with stigmatized artisanal and even clandestine production in hidden shacks. At the time, artisanal family firms were considered primitive — paradoxical in a country that would later give rise to the Slow Food Movement that praised such organizations. It is intriguing, therefore, that it was a young lady, Giannola Nonino — the wife of Benito, an exceptional distiller but marginal entrepreneur in the North Italian Friulian province — who turned the savoury spirit from a social no go to an hedonic must of Italian after-dinner tasting.

Giannola and her family, thanks to their Grappa di Picolit, created a beachhead into the expensive high status category occupied by foreign spirits; other artisanal producers followed and, eventually, the whole meaning of grappa in Italian society turned on its head. Grappa became “lo spirito nazionale,” at equal level with whisky and cognac (see figure below).

Figure 1. Category positions in the superordinate class of spirits in the Italian marketfigure-1-grappa-nonino

What can we learn from this story on how to elevate the status of a whole market category? We discovered that turning a weak low status position into a strong high status one is possible thanks to theorization by allusion — in other words, by performing a sort of cultural judo, never attacking directly the powerful market incumbents while relying on a perfect understanding of the cultural context of the market and of the own distinctive strengths.

Fundamentally, the strategy of allusion is based on three interconnected tactics:

  1. Detach yourself from the category in which customers put you. You should first confuse your customers and stakeholder. Giannola designed the bottle and presented herself in a way that contradicted restaurateurs’ and critics’ expectations on what grappa is and should be. When looking at the design and shape of the tiny minimalist bottle (see picture below) they wondered: ‘Is this grappa?’ When confronted with a young passionate lady dressed in Armani fashion, sommelier in restaurants were puzzled, but listened. Moreover, although the Noninos initially gave their precious bottles as gifts to prominent Italians, afterwards the price of Grappa di Picolit was set at an ‘astronomical’ level — again, as a way of distancing themselves from the low status traditional ‘grappa’ category. Finally they avoided any direct cooperation with grappa producers. They sought to avoid any risk of stigma by association. In the first stage of status elevation you should avoid bad company. All these tactics detached the product form the grappa category. But, puzzling your customers and stakeholders is not enough—you need a second tactic…small-grappa-nonino

    1. Emulate a proximate high status category. In other words, in addition to confusing potential clients and consumers you should provide a key by which to answer the confusion. The Noninos, supported by the anarchist maverick food and wine critic Luigi Veronelli, did so by adopting the vocabulary and practices of high status French wine (single grape, appellation of origin, cru). They also networked and convinced distinguished wine sales agent to distribute their grappa. And they directly addressed sommeliers in reputed restaurants. Doing so gave these stakeholders a language for talking about grappa in distinguished terms. Importantly, emulation is not the same as directly competing with high status members of the category in which you are located – the Noninos did not try and emulate and thus directly challenge premium cognac nor whisky.
    2. Engage in storytelling that connects tradition and cultural innovation. All of the previous tactics and efforts will be useless if you fail to engage in appropriate storytelling. It is necessary to embed and engage your product in stories beyond your immediate market, stories that resonate with wider cultural debates. Such cultural engagement is pivotal. Otherwise, why should a sommelier or a wine critic believe in the analogy between grappa and French wine? The Noninos used a kind of tightrope storytelling. On the one hand they reinterpreted and praised fading cultural traditions and national institutions: they fought for the preservation of traditional Friulian grapes, boldly presented themselves as a family business, promoted artisanal methods as authentic, and linked their bottles to traditional Venetian glass manufacturing. On the other hand, they connected grappa to the emerging Milanese art design and fashion movements and launched a Literary Award to anchor their story to an upward wave of national identity affirmation that resonated with the values of the Italian emerging elites.

    It is unlikely that the push for radical status elevation could be delegated to a PR agency. What we learned from this case is that unusual success only occurs when authentic messages are conveyed by authentic messengers that put their face and themselves at stake. And status dynamics of market categories are not important for consumer products only! Consider that institutional entrepreneurs are much needed in our organizations if we want to address the grand challenges of our times. Take these two examples: How to elevate the status of vegetarian meals in order to favour the reduction of carbon-intensive meat and dairy consumption? Or how to reduce the status of private in comparison to public transportation for the same aim?

    Notes:

    • This blog post is based on the authors’ paper How Cinderella Became a Queen Theorizing Radical Status Change published in Administrative Science Quarterly, December 2016.

    • The post gives the views of its authors, not the position of LSE Business Review or the London School of Economics.

    • Featured image credit: Nonino grappa distillery, by Riccardo Cattapan, ©Nonino 

    • Before commenting, please read our Comment Policy.

Who’s Afraid Of Responsibility? The Aftermath Of The Financial Bank Crisis

[We’re pleased to welcome Rolf Brühl, Chair of Management Control at ECSP Europe School of Business. Brühl co-authored an article with Max Kury in the International Journal of Business Commujob.gifnication entitled “Rhetorical Tactics to Influence Responsibility Judgments: Account Giving in Banks Presidents’ Letters During the Financial Market Crisis.” Notes from Brühl:]

Reading the following quote from a leading bank, “We believe we have an affirmative responsibility to play an even bigger role in helping solve the economic, social and environmental challenges of the day” (JPMorgan Chase & Co., 2012), should make us curious about its sincerity. It is hard to find a bank website and not to read sentences like this introductory quotation. We seem to live in the era of corporate social responsibility, and to take responsibility is said to be an important cornerstone of a modern, ethical corporation.

However, do corporations really take full responsibility for their actions? Content analysis of presidents’ letters in the annual financial reports shows accounts as a rhetoric device directed to influence stakeholders in their responsibility judgment. Our results indicate that bank managers in the financial market crisis primarily use accounts which do not directly address responsibility.

This may inspire future research to have a closer look on account giving in the communication of companies if different layers of the responsibility pyramid are concerned (Carroll, 1991): economic, legal, moral responsibilities.

 

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Announcing the Winner of Public Finance Review’s Outstanding Paper Award of 2015

We’re pleased to congratulate Timothy F. Page and Karen Smith Conway, winners of the Outstanding Paper Award of 2015 from Public Finance Review! Their award-winning article entitled “The Labor Supply Effects of Taxing Social Security Benefits” appeared in the May 2015 issue of Public Finance Review.

The abstract:PFR_72ppiRGB_powerpoint

In 1983, federal and state governments began taxing the social security benefits of high-income elderly. We develop a conceptual model and use 1981–1986 Current Population Survey data to estimate the policy’s labor supply effects. Our estimates suggest that the approximate 20 percent reduction in benefits for the highest income individuals led to a two to five percentage point increase in their labor force participation. Using 2008 data, we show that failing to index the taxation thresholds for inflation, adding a second set of thresholds in 1993, and removing the earnings test in 2000 all substantially magnify the policy’s scope.

You can read this article for free for the next 30 days by clicking here. Want to know about all the latest research and announcements from Public Finance Review? Click here to sign up for e-alerts!

Book Review: The Third Globalization: Can Wealthy Nations Stay Rich in the Twenty-First Century?

51w5r5VDcuL._SX330_BO1,204,203,200_The Third Globalization: Can Wealthy Nations Stay Rich in the Twenty-First Century? Edited by Dan Breznitz, John Zysman . Oxford, UK and New York: Oxford University Press, 2013. 432 pp. ISBN 978-0199917822, $105 (Cloth); ISBN 978-0199917846, $39.95 (Paperback).

Hiram Samel of the University of Oxford recently took the time to review the book in the October Issue of ILR Review.

From the review:

A marked lack of sustainable economic growth has become an unfortunate but predominant characteristic of wealthy nations in the seven years following the ILR_72ppiRGB_powerpointfinancial crisis. Whether policymakers pursue fiscal stimulus or austerity, the outcome has been far from satisfactory. Notwithstanding Carmen Reinhart and Kenneth Rogoff’s argument that financial crises require a longer recovery time, is it possible that policymakers have the mix of policies wrong? The vast majority of wealthy states, after all, liberalized markets in the past two decades with the hope of emulating U.S. innovation and growth only to find instead they needed to reinsert themselves when capital and labor markets stalled. Given this failure, how prepared will the same states be for the next era of global competition, when emerging economies such as China and India that have benefited from rapid technological advances begin to leverage their economic and intellectual scale?

The authors of The Third Globalization address this question with a series of essays framed around a dilemma the editors, Dan Breznitz and John Zysman, term the “double bind.” In psychiatry, individuals face a double bind when they are unable to decide between conflicting statements from highly valued but distinct actors. In adapting the concept to political economy, the editors argue that politicians and policymakers in wealthy nations face similar indecision. On one hand, they need free markets to stimulate innovation and growth while, on the other hand, they need to reassert control of markets to foster social stability. The question is, can they do both at the same time?

You can read the rest of the review from ILR Review for free for the next two weeks by clicking here. Like what you read? Click here to sign up for e-alerts and have all the latest research and reviews like this sent directly to your inbox!