Working Paper: CEPR ID: DP1955
Authors: Roland Benabou; Efe A. Ok
Abstract: Even relatively poor people oppose high rates of redistribution because of the anticipation that they, or their children, may move up the income ladder. This ?Prospect of Upward Mobility? (POUM) hypothesis is commonly advanced to explain why democracies do not engage in large-scale progressive redistributions. But is it compatible with rational expectations, given that not everyone can end up richer than average? This paper establishes the formal basis for the POUM hypothesis. There is a range of incomes below average where agents oppose lasting redistributions, provided tomorrow?s expected income is increasing and concave in today?s income. The laissez-faire coalition is larger the more concave the transition function and the longer the political horizon. We illustrate the general analysis with an example (calibrated to the United States) where three-quarters of families are always poorer than average, yet a two-thirds majority has expected future incomes above the mean. We also analyse mobility matrices from the Panel Study on Income Dynamics (PSID) and find significant evidence of the POUM effect.
Keywords: redistribution; social mobility; political economy
JEL Codes: D63; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower current income (E25) | support lower tax rates (H29) |
| concave relationship between current income and expected future income (D11) | support lower tax rates (H29) |
| increased forecast horizon for income (G17) | decrease in support for redistribution (D39) |
| concavity of expected transition function (C61) | diminish political coalition in favor of redistribution (D72) |
| prospect of upward mobility (J62) | shift in political preferences against redistribution (D39) |