A model of redistribution under social identification in heterogeneous federations

Abstract

Redistribution of resources to accommodate income heterogeneity within a federation is often fiercely debated (e.g., Belgium, Germany or the European Union). To help elucidate potential drivers behind such debates, this article builds on social identity theory to develop a theoretical framework linking jurisdictional identification and preferences towards intra-federation redistributive financial flows. We show that federal, rather than local, identification can lead individuals to shift their redistribution preferences against their narrowly-defined personal economic interest. In contrast to predictions of standard models, the sign and strength of this effect depends crucially not only upon individuals' characteristics, but also upon the social groups (i.e. regions) to which they belong. We furthermore illustrate that federal, rather than regional, identification should be more widespread in poorer and/or more populous regions within a federation, but less common in regions which are very homogeneous internally or very dissimilar from the rest of the federation.