Inequality, Relative Income, and Development: Field-Experimental Evidence from the Bolivian Amazon

Much macroeconomic research hypothesizes income distribution to play an important role for economic growth, as inequality shapes the process of development through its interaction with credit market imperfections or the political economy. However, the nature of this research remains conjectural, and all hitherto available evidence comes from correlations. As a consequence, little is known empirically about the causal relationship between inequality and growth, its determinants, and its direction. To obtain evidence on the causal link from inequality to growth, this paper presents an analysis of a randomized controlled trial in 40 villages of an Amazonian hunter-gatherer society. In the experiment, we randomly allocated substantial income transfers in the form of rice, altered their associated degree of village income inequality, and measured the short-run e¤ects on important individual-level determinants of development. While in one treatment we divided an aggregate amount of rice equally among all households in the treated villages, in another treatment we injected greater income equality in some villages by transferring the same amount of rice but allocating it only to the poorest 20% of households. This design enables us to disentangle ordinary income e¤ects from relative income e¤ects due to social comparisons, which are derived from reduced income inequality. We …nd that human capital investments (in the form of studying Spanish) and modern-asset wealth, both of which increase the villagers’ expected future earnings through exposure to the outside labor market, are strongly driven by relative social comparisons. Unlike in the treatment where the aggregate transfer was divided equally, the poorest 20% neither signi…cantly improved their Spanish nor worked harder foraging and farming when they were the primary bene…ciaries of the rice transfers, We thank George Akerlof, Tim Besley, David Cesarini, Raquel Fernández, Xavier Gabaix, Dean Karlan and Alessandro Lizzeri for their comments and suggestions, and Jimena Vásquez for very good research assistance. We also thank seminar participants at Brandeis University, University of Georgia, Harvard School of Public Health, the Annual Conference of the Society of Medical Anthropology (Yale University, 2009), and the World Bank for comments on a preliminary version of the paper. The National Institute of Child Health of the National Institute of Health …nanced this research. The proposal to NICHD was entitled "Inequality, social capital and health in Bolivia" (Grant # NICHD, 1R21HD050776). We obtained IRB approval from Northwestern University (IRB project approval # STU0007) and from the Great Tsimane’Council before data collection.