Abstract
This paper shows that perceptions of inequality are a key factor in the formation of preferences for redistribution and thereby in the determination of the equilibrium redistribution level. We build on the novel stylized facts provided by the survey experimental literature on perceptions of income inequality, highlighting that agents incorrectly estimate the shape of the income distribution because of limited information. Agents with income above the mean believe they are poorer than they actually are, and agents with income below the mean believe themselves to be richer. We revisit the standard framework on the political economy of redistribution and extend it in two ways. First, we introduce a more general two-sided inequality aversion. Second, we incorporate perceptions of income inequality, modeled by assuming that agents form expectations on the income level of the richest and the poorest in society. We show analytically that the equilibrium redistribution level is crucially determined by the interplay between the information treatment correcting the bias in perceptions of inequality and fairness considerations specified by the degree of inequality aversion. By doing this, we add (biased) perceptions of inequality to the list of potential factors explaining why, notwithstanding high inequality, an increase in the desire for redistribution has not been observed in many countries.
Highlights
What determines individuals’ preferences for redistribution? To answer this question, many scholars have investigated the role income inequality plays in the subject matter: does a high level of income inequality stimulate a higher demand for redistribution? far, a consensus on the relationship between these two dimensions has not been reached in the literature.Lately, the focus of the quest for the key determinants of redistributive preferences has shifted away from the actual inequality level to its perception
Gimpelson and Treisman (2018) advocate that a more in-depth analysis of perceptions of inequality should be included in forthcoming political economy models of redistribution, which is justified by the fact that survey evidence shows that preferences for redistribution happen to be more strongly correlated with perceptions of inequality rather than with the actual inequality level
We embedded the findings from the survey experimental literature on perceptions of inequality into a political economy model of redistribution
Summary
What determines individuals’ preferences for redistribution? To answer this question, many scholars have investigated the role income inequality plays in the subject matter: does a high level of income inequality stimulate a higher demand for redistribution? far, a consensus on the relationship between these two dimensions has not been reached in the literature. Hoy and Mager (2019) confirm the evidence whereby all agents believe themselves to belong to the middle class, the so-called middle-class bias Building on this experimental consensus, this paper’s objective is to analyze the effect of individuals’ perceptions of inequality on the equilibrium redistribution level in an economy. The role of the perceptions of inequality would be undermined and not properly understood We believe that these results can help understand various mechanisms at work behind real-world outcomes of voting on redistribution issues, that better data and estimates of income inequality are.
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
