Working Paper: NBER ID: w24900
Authors: Lubos Pastor; 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
JEL Codes: D72; F65; G11; G12; G18; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| economic growth (O49) | rising income inequality (D31) |
| rising income inequality (D31) | populist backlash against globalization (F69) |
| rising income inequality (D31) | support for populism (D72) |
| support for populism (D72) | preference for candidates promising to end globalization (F69) |
| rising income inequality (D31) | trade-off between consumption and inequality (F62) |
| economic growth (O49) | changes in voter preferences for equality (K16) |