Fairness and Redistribution: Us Versus Europe
Harvard Institute Research Working Paper No. 1983
51 Pages Posted: 5 Nov 2002
Date Written: January 2003
Different beliefs about how fair social competition is and what determines income inequality, influence the redistributive policy chosen democratically in a society. But the composition of income in the first place depends on equilibrium tax policies. If a society believes that individual effort determines income, and that all have a right to enjoy the fruits of their effort, it will choose low redistribution and low taxes. In equilibrium, effort will be high, the role of luck limited, market outcomes will be quite fair, and social beliefs will be self-fulfilled. If instead a society believes that luck, birth, connections and/or corruption determine wealth, it will tax a lot, thus distorting allocations and making these beliefs self-sustained as well. We show how this interaction between social beliefs and welfare policies may lead to multiple equilibria or multiple steady states. We argue that this model can contribute to explain US vis-a-vis continental European perceptions about income inequality and choices of redistributive policies.
Keywords: Inequality, Redistribution, Fairness, Political Economy, Median Vote
JEL Classification: D7, E6, H1
Suggested Citation: Suggested Citation