We introduce a new distinction between inequality in initial endow-
ments (e.g., ability, inherited wealth) and inequality of what one
can obtain as rewards (e.g., prestigious positions, money). We show
that, when society allocates resources via tournaments, these two
types of inequality have opposing effects on equilibrium behavior
and well-being. Greater inequality of rewards hurts most people?both
the middle class and the poor?who are forced into greater effort.
Conversely, greater inequality of endowments benefits the middle
class. Thus, the correctness of our intuitions about the implications
of inequality is hugely affected by the type of inequality considered.
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