Diversity and redistribution

Raquel Fernández, Gilat Levy

    Research output: Contribution to journalArticle

    Abstract

    In this paper we analyze the interaction of income and preference heterogeneity in a political economy framework. We ask whether the presence of preference heterogeneity (arising, for example, from different ethnic groups or geographic locations) affects the ability of the poor to extract resources from the rich. We study the equilibrium of a game in which coalitions of individuals form parties, parties propose platforms, and all individuals vote, with the winning policy chosen by plurality. Political parties are restricted to offering platforms that are credible (in that they belong to the Pareto set of their members). The platforms specify the values of two policy tools: a general redistributive tax which is lump-sum rebated (or used to fund a general public good) and a series of taxes whose revenue is used to fund specific (targeted) goods tailored to particular preferences or localities. Our analysis demonstrates that taste conflict first dilutes but later reinforces class interests. When the degree of taste diversity is low, the equilibrium policy is characterized by some amount of general income redistribution and some targeted transfers. As taste diversity increases in society, the set of equilibrium policies becomes more and more tilted towards special interest groups and against general redistribution. As diversity increases further, however, the only policy that can emerge supports exclusively general redistribution.

    Original languageEnglish (US)
    Pages (from-to)925-943
    Number of pages19
    JournalJournal of Public Economics
    Volume92
    Issue number5-6
    DOIs
    StatePublished - Jun 2008

    Keywords

    • Diversity
    • Income inequality
    • Political parties
    • Preferences
    • Redistribution

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics

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