Preferences for and Productivity Consequences of Different Fairness Paradigms of Income Distribution: An Experimental Investigation into Productive Effort and Income Distribution

Abstract

This study aims to investigate preferences for equity and the efficiency implications of various income distribution strategies. We employ a multi-period, three-player ultimatum/dictator game combined with a real-effort task. Our findings reveal that when both roles and funds are earned through effort, equal income distribution results in the lowest productivity, while tournament style distribution achieves the highest. However, both approaches are frequently rejected, indicating perceptions of unfairness. In contrast, effort-proportional pay generates the highest total income when accounting for losses due to rejections. These results suggest that in this experimental context, the optimality of neoclassical income distribution stems from its perceived fairness.