Fairness and inequality tolerance: Evidence from the Life in Transition Survey

•I examine tolerance for inequality in transition economies using observational data.•I argue that aggregate indices of inequality may not be ideal is such settings.•I build on a model from the experimental literature that allows for status concerns.•The model finds evidence of inequality aversion, not captured by the Gini index.•Aversion to inequality is tied to fairness concerns.

This paper examines the link between inequality and individual well-being using household survey data from 27 transition economies, where income inequality increased considerably since 1989. A test of inequality aversion in individual preferences that draws on the Fehr and Schmidt (1999) specification of inequality aversion is proposed, and the difficulties of implementing it in a non-experimental setting are discussed. Estimates based on this model confirm aversion to inequality among individuals both in the pooled sample and separately among the EU and non-EU countries. The Gini index, on the other hand, is unable to capture this negative effect of inequality on well-being. Notably, inequality aversion is not intrinsic. Rather, it appears to be tied to a concern with the fairness of the institutions underlying the distribution of fortunes in society. The evidence is suggestive of inequality of opportunity driving attitudes toward overall inequality.