Upper and Lower Bounds of Inequality of Opportunity: Theory and Evidence for Germany and the US

Theories of distributive justice distinguish between ethically acceptable inequalities –due to di¤erences in e¤ort –and unfair inequalities –due to circumstances beyond the sphere of individual responsibility. In this paper, we suggest a new estimator of inequality of opportunity (IOp) which allows identifying an upper bound for unfair inequalities in addition to the well-known lower bound estimator. We illustrate our approach by comparing IOp estimates for Germany and the US based on harmonized micro data. Our lower bound estimates yield IOp shares of 30% for annual earnings in Germany. The upper bound of IOp, in contrast, accounts for around 70% of the observed inequality. Results for the US are signi…cantly lower with shares of 16 and 40% respectively. Hence, equality of opportunity is higher in the "land of opportunities". Our results further suggest that lower bound estimates of IOp might demand for too little redistribution in order to equalize unfair inequalities. A policy simulation reveals that the abolishment of joint taxation in favor of individual taxation signi…cantly reduces IOp. JEL Codes: D31, D63, H24, J62