Competition, Income Distribution, and the Middle Class: An Experimental Study

Abstract

We study the effect of competition on income distribution by means of a two-stage experiment. Heterogeneous endowments are earned in a contest, followed by a surplus-sharing task. The experimental test confirms our initial hypothesis that the existence of a middle class is as effective as institutional hurdles in limiting the power of the less able in order to protect the more able players from being expropriated. Furthermore, majoritarian voting with a middle class involves fewer bargaining impasses than granting veto rights to the more able players and, therefore, is more efficient.