Inequality Snowballing

It has long been argued that efficient policies tend to provide larger legal entitlements to the rich than to the poor. This article shows how efficient legal rules can become even more skewed against the poor over time by sowing the seeds of their own vicious cycles. Repeated application over time of statically efficient legal rules can lead to rules that become increasingly adverse to the poor, which the article calls “policy snowballing.” Consider a set of polluters choosing between locating in places with rich versus poor people and facing a strict liability rule for damage to earnings. Polluters will disproportionately locate in the poor area, where they face lower damages. That disproportionate share of polluters in the poor area drives down the earnings of the poor further, making subsequent polluters locate yet more disproportionately in poor neighborhoods, driving down the poor’s earnings yet further. We identify the conditions for snowballing and explore its dynamics. When compensation for the harm is incomplete, policy snowballing can lead to spiraling income inequality. As a result, if there are government taxes and transfers to the poor, those would be inadequate if calculated in a static way that ignores the snowballing. The article raises the intriguing prospect that efficient policymaking could be a contributing factor to increasing inequality over time