How do people perceive income inequality? A Czech case

• Thesis title in Czech: Jak lidé vnímají přijmovou nerovnost? Český případ
• Thesis title in English: How do people perceive income inequality? A Czech case
• Academic year of topic announcement: 2016/2017
• Thesis type: Bachelor's thesis
• Thesis language: angličtina
• Department: Institute of Economic Studies (23-IES)
• Supervisor: PhDr. Václav Korbel, Ph.D.
• Author: hidden - assigned by the advisor
• Date of registration: 21.05.2017
• Date of assignment: 21.05.2017
• Date and time of defence: 11.06.2018 09:00
• Venue of defence: Opletalova - Opletalova 26, O206, Opletalova - místn. č. 206
• Date of electronic submission: 06.05.2018
• Date of proceeded defence: 11.06.2018
• Opponents: Ing. Tomáš Želinský, Ph.D.

References

Bibliography
Cruces, G., Perez-Truglia, R. and Tetaz, M. (2013). Biased perceptions of income distribution and preferences for redistribution: Evidence from a survey experiment. Journal of Public Economics, 98, pp.100-112.

Engelhardt, Carina, and Andreas Wagener. "Biased perceptions of income inequality and redistribution." (2014).

Gimpelson, Vladimir, and Daniel Treisman. Misperceiving inequality. No. w21174. National Bureau of Economic Research, 2015.

Kuziemko, Ilyana, et al. "How elastic are preferences for redistribution? Evidence from randomized survey experiments." The American Economic Review 105.4 (2015): 1478-1508.

Alesina, Alberto, and Marios Angeletos. Fairness and redistribution: US versus Europe. Harvard Institute of Economic Research, Harvard University, 2002.

Norton, Michael I., and Dan Ariely. "Building a better America—One wealth quintile at a time." Perspectives on Psychological Science 6.1 (2011): 9-12.

Preliminary scope of work in English

Research question and motivation
In recent years, there has been widespread concern that economic growth has not been fairly shared and the economic crisis has only widened the distribution of income. The gap between rich and poor is continuously expanding, and thus there is a need for further examination. The distribution of income can reveal quite useful information about the economy and economic development of a given country as it is one of the most important indicators of the well-being of its citizens. Unfortunately, an essential issue arises – there is a distortion between objective and perceived income distribution. Objective refers to data analysis received from official statistics, perceived refers to how people view the income distribution and their position in it.
Many studies have concluded (e.g. Engelhardt, Wagener, 2014) that there is an argument why empirical tests of the Meltzer-Richards hypothesis of redistribution and other research often appear to be inconclusive or negative. The crucial reason is that perceived levels of income inequality rather than objective income inequality play a vital role in the political economy and public finance, and thus they have a large impact on policy decision making.
There is a sufficient amount of evidence suggesting that people misperceive the income distribution (Cruces, Perez-Truglia, Tetaz, 2013). Individuals observe the levels of income from a very small fraction of the population and based on that information they deduce the entire income distribution. If they do not properly take into account the selection process, their conclusions will be systematically biased. This outcome may be caused by the limited amount of available information, failure of using information properly, or relative position within the reference group.
The last-mentioned reason induces issues in overall perceptions of income inequality but it may not be troubling for another hypothesis. This hypothesis claims that people have an accurate perception of income inequality in the region in which they live, rather than on a nationwide scale, after controlling for all independent variables. People usually make assumptions about income distributions based on the set of their individual interactions (i.e. from friends, family, co-workers). Their reference groups most probably live in the same area as them. Thus, they have a relatively precise notion about income distribution within the area of their residence.

Questions:
How does perceived and actual income differ across the Czech Republic?
Do people perceive income inequality better regionally?

Contribution
There is a large number of studies concerning perceived income inequality from different countries all around the world. However, there is a surprising lack of thorough up-to-date research in the Czech Republic. The aim of this bachelor thesis is at least partly to fill in the gaps and to analyse the current situation of perceived income distribution in the Czech Republic to determine whether there are larger inconsistencies in people’s perceptions of inequality nationally than regionally, or whether the regional measure as an explanatory variable has no ceteris paribus effect on inconsistencies in people’s perceptions.

Methodology
I will answer the questions mentioned above by analyzing available data for the Czech Republic. The core data that I plan to use are gathered from publicly accessible databases (SILC dataset) and from recent research on secularization and religious belief in the Czech Republic and Slovakia, Willard and Cingl (2017).
The principal aim is to compare data of objective income inequality and perceived income inequality and test whether there is a lesser distortion when the regional scale rather than the national scale is taken into account. The dataset from Willard and Cingl (apart from observations concerning religion and secularization which are not relevant for this bachelor thesis) includes the individual’s income bracket, region and city of residence, individual difference measures on perceptions of equality and security in government institutions, and cognitive biases and credibility enhancing displays in the Czech Republic. These variables will serve very well for the purpose of testing the given hypothesis.
The first model is used to provide results from regressing actual income inequality on social expenditures, in various specifications. The second model contains a dependent variable: perceptions of equality in government institutions and independent variables: income bracket, region and level of education. Stronger social protection measures tend to be associated with more positive perceptions of government institutions, and thus there is a negative association between generalized trust in institutions and perceived income inequality (Stephany, 2015). This fact can be used to examine the results.
The bias is constructed as the level of objective income inequality minus the level of perceived income inequality. The desired goal is to determine whether the regional scale has an impact on perceived income inequality and whether this softens the bias after fixing all independent variables.

Outline
1. Introduction and problem setting
2. Overview of existing literature
3. Basic model
4. Data analysis, empirical research
5. Results
6. Conclusion