Compensating Differences

What economists call an ability to make "compensating differences" is a valuable tool in everyone's arsenal. If people are prohibited from doing so, they are always worse off. You say, "Williams, I never heard of compensating differences. What are they?"

Jimmy Soul's 1963 hit song, "If You Wanna Be Happy," explained the concept of compensating differences. His lyrics went: "If you want to be happy for the rest of your life, never make a pretty woman your wife. So from my personal point of view, get an ugly girl to marry you." His point was that an ugly woman would treat you better. But more importantly, a less attractive woman's willingness to compensate for her differences enables her to effectively compete with a pretty woman.

It goes the other way around, too. I've presented people with the following scenario: Suppose you saw a fat, ugly cigar-smoking old man married to a beautiful young woman. What kind of prediction would you make about the man's income? Everybody I've asked guesses that he would have a high income. The fat, ugly cigar-smoking old man would essentially be telling the beautiful young woman, "I can't compete for your hand the same way a guy like Williams can, so I'm going to offset my handicap by offering you a higher price."

Some might view it as unfair that a fat, ugly cigar-smoking old man could not win a pretty woman's hand on the same terms as a handsome man. Suppose they enacted a law saying beautiful women cannot treat fat, ugly cigar-smoking old men any differently than they treat handsome men. Then what would happen to the probability of a fat, ugly cigar-smoking old man's marrying a beautiful woman? Most people would guess that it would go to zilch. What the law would do would be to remove the less preferred man's most effective tool for competing with the more preferred man.

There are many real-world examples of compensating differences..

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