Aversion to Inequality and Segregating Equilibria

This working paper shows that models where preferences of individuals depend not only on their allocations, but also on the well-being of other persons, can produce both large and testable effects. We study the allocation to firms of workers with heterogeneous productivities to firms. We show that even small deviations from purely selfish preferences lead to widespread workplace skill segregation.

This result holds for a broad class and distribution of social preferences. That is, workers of different abilities tend to work in different firms, as long as they care somewhat more about the utilities of workers who are close.