Working Paper: CEPR ID: DP13107
Authors: Lubo Pstor; Pietro Veronesi
Abstract: Motivated by the recent rise of populism in western democracies, we develop a tractable equilibrium model in which a populist backlash emerges endogenously in a strong economy. In the model, voters dislike inequality, especially the high consumption of ``elites." Economic growth exacerbates inequality due to heterogeneity in preferences, which generates heterogeneity in returns on capital. In response to rising inequality, rich-country voters optimally elect a populist promising to end globalization. Equality is a luxury good. Countries with more inequality, higher financial development, and trade deficits are more vulnerable to populism, both in the model and in the data.
Keywords: inequality; populism; globalization; brexit; trump
JEL Codes: G11; G12; G18; D72; F65; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| economic growth (O49) | increased inequality (F61) |
| increased inequality (F61) | voting behavior toward populist candidates (D72) |
| economic growth (O49) | voting behavior toward populist candidates (D72) |
| high consumption of elites (D12) | voting behavior toward populist candidates (D72) |
| higher inequality (D31) | vulnerability to populism (F52) |
| financial development (O16) | vulnerability to populism (F52) |
| trade deficits (F14) | vulnerability to populism (F52) |
| populist election (D72) | shift to autarky (F00) |
| shift to autarky (F00) | reduced consumption (E21) |
| shift to autarky (F00) | reduced inequality (I14) |
| equality viewed as a luxury good (D63) | higher agents willing to sacrifice consumption for more equality (D10) |