Abstract
We study an electoral competition model in which each voter is characterized by income level and non-economic characteristics, and where two vote share maximizing candidates, with fixed non-economic characteristics (differentiated candidates), strategically promise a level of redistribution. We prove existence of a unique Nash equilibrium which is characterized by policy convergence or divergence depending on whether candidates redistribution technologies are symmetric or not. Perhaps more importantly, we show that, independently of whether the equilibrium is convergent or divergent, there are three predominant effects on equilibrium tax rates: the group-size effect (the larger an income group, the larger its influence on equilibrium tax rate), the income effect (poor voters are more responsive to a redistributive transfer) and the within-group homogeneity effect (the degree to which voters of the same income group have similar non-economic characteristics). The latter drags redistribution towards the preferred level of redistribution of the less divided - in terms of non-economic characteristics - income group and may dominate over the other two.
Highlights
Over the past three decades, income inequality has steadily risen in many democracies and the middle class has become relatively poorer (Piketty and Saez 2003; Atkinson et al 2011)
We show that, independently of whether the equilibrium is convergent or divergent, there are three predominant effects on equilibrium tax rates: the group-size effect, the income effect and the within-group homogeneity effect
Models assuming that rich voters are more involved in politics or finance candidates’ campaigns (e.g., Campante 2011) may explain part of the phenomenon, but they cannot fully account for the sharp decline in redistribution that is observed since the income share of most of the engaged voters is decreasing as well
Summary
Over the past three decades, income inequality has steadily risen in many democracies and the middle class has become relatively poorer (Piketty and Saez 2003; Atkinson et al 2011). Standard models of redistributive politics (Meltzer and Richard 1981; Cox and McCubbins 1986; Alesina and Rodrik 1994; Persson and Tabellini 2001; Roemer 2005; Benhabib and Przeworski 2006) cannot explain the empirical puzzle described above as they predict median-preferred equilibrium levels of redistribution: as the median becomes poorer, redistribution is predicted to increase In all those models, the relative size of poor versus rich voters drives the result as politicians will always pander to the relatively larger group—we call this the group-size effect. We are able to prove that the within-group homogeneity effect is robust to candidates being characterized by distinct redistribution technologies: as the poor become more divided in non-economic characteristics compared to the rich, the tax rates proposed in equilibrium by both candidates become lower This finding unambiguously strengthens the empirical relevance of the analysis as it establishes that the described effect is not an artifact of considering symmetric redistribution technologies. We comment on the implications of our results on issues of applied interest
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