Working Paper: CEPR ID: DP4159
Authors: Hans Peter Grüner
Abstract: This Paper develops a model of political consensus in order to explain the missing link between inequality and political redistribution. Political consensus is an implicit agreement not to vote for extreme policy proposals. We show that such an agreement may play an efficiency-enhancing role. Voters anticipate that voting for extremist parties increases policy uncertainty in the future. A political consensus among voters reduces policy uncertainty because self-interested politicians propose non-discriminatory policies. We study how much inequality can be sustained in a democracy and how the limits to redistribution vary with initial inequality. We find that the bounds of the set of political equilibria may react in a fundamentally different manner to changes in exogenous variables than do the policy variables in the one-dimensional, one-shot game. More initial inequality need not lead to more redistribution from the rich to the poor. The maximum amount of redistribution decreases with inequality if (and only if) agents are sufficiently patient. In this case inequality is politically self-sustaining.
Keywords: comparative statics in political economy; inequality; policy uncertainty; political consensus; representative democracy
JEL Codes: C72; D31; D70; D72
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Initial inequality (C29) | Political consensus (D70) |
| Political consensus (D70) | Redistribution (H23) |
| Initial inequality (C29) | Redistribution (H23) |
| Voters' anticipation of extremist parties (D72) | Preference for centrist policies (D72) |
| Initial inequality (C29) | Maximum amount of redistribution (H23) |