Social Capital Can Lessen Redistribution: A Political Economy Analysis
27 Pages Posted: 1 Nov 2016 Last revised: 5 May 2017
Date Written: May 4, 2017
We investigate the effect that social capital and social interactions may have on public policy by enabling individuals to observe one another’s incomes, providing them with information about the distribution of income in the economy. Individual incomes are taxed at a flat rate that is determined in a political equilibrium, and tax proceeds are used to procure a public good. The mean income in the economy can take different values, and is unobserved by individuals if social capital is low. We find that, more often than not, the state of the economy will be such that the taxes are going to be higher if social capital is low. Our framework describes a previously unreported relationship between social capital and public policy.
Keywords: social capital, redistribution, inequality
JEL Classification: H41, D72
Suggested Citation: Suggested Citation