Working Paper: NBER ID: w11570
Authors: Raquel Fernández; Gilat Levy
Abstract: This paper examines how preference heterogeneity affects the ability of the poor to extract resources from the rich. We study the equilibrium of a game in which coalitions of individuals form parties, parties propose platforms, and all individuals vote, with the winning policy chosen by plurality. Political parties are restricted to offering platforms that are credible (in that they belong to the Pareto set of their members). The platforms specify the values of two policy tools: a general redistributive tax which is lumpsum rebated and a series of taxes whose revenue is used to fund specific (targeted) goods. We show that taste conflict first dilutes but later reinforces class interests. When the degree of taste diversity is low, the equilibrium policy is characterized by some amount of general income redistribution and some targeted transfers. As taste diversity increases in society, the set of equilibrium policies becomes more and more tilted towards special interest groups and against general redistribution. As diversity increases further, however, only general redistribution survives.
Keywords: Diversity; Redistribution; Political Economy; Preference Heterogeneity
JEL Codes: D30; D72
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Low preference diversity (J15) | General redistribution + targeted transfers (H23) |
| Increased preference diversity (J79) | Tilt towards special interest policies (D72) |
| High preference diversity (J15) | Collapse of special interest coalitions (D72) |
| Collapse of special interest coalitions (D72) | Maximum general redistribution (D39) |
| Increased preference diversity (J79) | Less general redistribution and more targeted taxation until a critical point is reached where maximum redistribution becomes the unique outcome (H23) |