**Regression results are presented in the Appendix and are centered on identifying correlates of downward mobility between 1989 and 2006.** The dependent variable takes a value of one if the individual reported moving up or staying in the same position, and zero if it reported downward mobility. We estimated probit regressions to facilitate the interpretation of the results; however, results were qualitatively equivalent under a multivariate regression on three types of movements. A movement is defined (as in section 3) as a movement in any direction of at least two steps, regardless of the initial point. Movements of only one step are considered as staying in the same step. We excluded households in the two lowest and uppermost steps in 2006 from the sample to avoid biases introduced by the mechanical effect of being unable to move in all possible directions (move down for the upper steps in 2006, and move up for lowest steps in 2006). All regressions and a thorough discussion of the methodology used are presented in the Appendices.

# **Perceptions of inequality, fairness and trust matter**

**Increases in country income inequality are associated with more negative perceptions of economic mobility.** Table A2.2 shows that household in countries in which inequality increased between 1989 and 2006 – measured by the ratio of the 80<sup>th</sup> /20<sup>th</sup> percentiles– had a higher probability of reporting downward movements in the income distribution (Column (3)). Using an alternative measure of Gini, obtained from the World Income Inequality Database shows also a negative effect of the increases in inequality with respect to the perception of movements up<sup>9</sup> (Column (4)). This alternative measure, though, is less consistent than the obtained from the World Development Indicators and is incomplete for most former Yugoslavia countries, so we preferred to use the original from the WDI for the rest of the report. As reported earlier when citing the 2006 WDR, “One reason that inequality might make people less happy, even when controlling for absolute income levels, is that it violates their sense of fairness” (p. 82). The Gini, a less sensitive measure to changes in the tails of the distribution, can potentially not capture this correlation.

**Perceptions of fairness in moving ahead in life are associated with more positive perceptions about economic mobility.** The perception that effort, hard work and intelligence are the most important factors to succeeding in life, rather than criminal or corrupt ties, or political connections, reduces the probability of reporting movements down. Specifically, those who believe in fairness have 9 percentage points less probabilities of perceiving a worsening in their relative position. This is particularly the case in higher income countries in ECA (Table A2.3).

**Trust in public institutions is associated with more positive perceptions about economic mobility.** For any individual, moving from a neutral approach to trust to becoming trusting in public institutions reduces the likelihood of perceiving movements down by 7 percentage points. This effect is stronger (10 percentage points) in low and lower-middle income ECA countries.<sup>10</sup>

**The perception of having done better than colleagues in 1989 is associated with less probabilities of perceiving downward economic mobility** . Individuals who reported a relative improvement compared to their peers pre-transition have a 4 percentage point lower probability of reporting downward mobility. This

> 9 <u>http://www.wider.unu.edu/research/Database/en_GB/database/</u>

> 10 We also performed a robustness check, by replacing this indicator for trust in religious institutions. The rationale behind is that if people who are more likely to be trustful are most likely to perceive improvements in their situation, then trust in religious institutions should be significant too. The results show that this variable is not significant. This suggests that the connection between trust in public institutions and perceptions is not driven by individual biases, but by actual beliefs about these institutions.

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