FAIR paper published in American Economic Review
A new NHH study, "Second-Best Fairness: The Trade-off between False Positives and False Negatives", is published in the September issue of American Economic Review.
Paper in American Economic Review
- A large-scale experimental study of how people trade off false positives and false negatives when deciding whether to pay an individual.
- 26,500 participants recruited from the general populations in the US and Norway.
- The two countries represent extremes among the OECD countries with respect to income inequality.
- In the main experiment the participants decide whether to pay a worker who has filed a claim for compensation that only workers who were not offered work are entitled to.
The paper Second-best fairness: The trade-off between false positives and false negatives by Professor Alexander W. Cappelen, Professor Cornelius Cappelen, and Professor Bertil Tungodden is published in American Economic Review.
AER is one of the Big Five journals in economics, along with Econometrica, the Journal of Political Economy, the Quarterly Journal of Economics, and the Review of Economic Studies.
The journal is included on the NHH bonus list and on the Financial Times Research Rank List.
OPTIMAL POLICIES
Professor Cappelen is Deputy Director and Professor Tungodden is Centre Director at Norwegian Centre of Excellence FAIR, and Cornelius W. Cappelen is Professor at the Department of Comparative Politics, University of Bergen.
`The findings shed light on the political economy of social insurance and redistribution´, Professor Tungodden says.
A focus in economics is how to design optimal policies in second-best situations, which often requires a trade-off between giving some individuals more than they deserve, false positives, and others less than they deserve, false negatives.
UNEMPLOYMENT BENEFITS
`To illustrate how the trade-off between false positives and false negatives may affect policy design, consider the debate about undeserving claimants receiving unemployment benefits. The strictness of the eligibility criteria reflects a trade-off between false positives and false negatives. The extension of the unemployment benefits in the US during the pandemic provides a recent illustration of this trade-off´, Tungodden says.
This paper provides novel evidence on people's second-best fairness. The researchers show that most people are more concerned with false negatives than with false positives, but they document substantial heterogeneity in second-best fairness preferences between the countries and across the political spectrum.
SYSTEMATIC DIFFERENCES BETWEEN THE US AND NORWAY
`First, we show that most people are more concerned with false negatives than false positives. This is robust across economic environments. Second, we find that people have strong preferences for avoiding one of the mistakes; most people are either strongly false negative averse or strongly false positive averse´.
Third, they document systematic differences between the US and Norway in second-best fairness preferences.
`Norway is characterized by a much more compressed income distribution and more income mobility than the US. The two countries also differ dramatically with respect to redistributive policies, with Norway having a significantly higher tax level and a more generous welfare state´.
`It is therefore of great interest to examine whether Americans and Norwegians differ in their second-best fairness preferences´, Tungodden says.