The sustainability of contribution norms with income dynamics

TL;DR

This paper investigates how income mobility and inequality influence the sustainability of contribution norms in repeated group interactions, revealing that mobility generally promotes cooperation while the impact of inequality varies.

Contribution

It introduces a model linking income mobility and inequality to contribution norm sustainability, highlighting the role of income dynamics in cooperative behavior.

Findings

Income mobility promotes cooperation.

The effect of inequality on contribution norms is ambiguous.

Application to optimal taxation shows interaction between redistribution mechanisms.

Abstract

The sustainability of cooperation is crucial for understanding the progress of societies. We study a repeated game in which individuals decide the share of their income to transfer to other group members. A central feature of our model is that individuals may, with some probability, switch incomes across periods, our measure of income mobility, while the overall income distribution remains constant over time. We analyze how income mobility and income inequality affect the sustainability of contribution norms, informal agreements about how much each member should transfer to the group. We find that greater income mobility facilitates cooperation. In contrast, the effect of inequality is ambiguous and depends on the progressivity of the contribution norm and the degree of mobility. We apply our framework to an optimal taxation problem to examine the interaction between public and private redistribution.