Working Paper: NBER ID: w9502
Authors: Alberto Alesina; Georgemarios Angeletos
Abstract: Different beliefs about how fair social competition is and what determines income inequality, influence the redistributive policy chosen democratically in a society. But the composition of income in the first place depends on equilibrium tax policies. If a society believes that individual effort determines income, and that all have a right to enjoy the fruits of their effort, it will chose low redistribution and low taxes. In equilibrium effort will be high, the role of luck limited, market outcomes will be quite fair, and social beliefs will be self-fulfilled. If instead a society believes that luck, birth, connections and/or corruption determine wealth, it will tax a lot, thus distorting allocations and making these beliefs self-sustained as well. We show how this interaction between social beliefs and welfare policies may lead to multiple equilibria or multiple steady states. We argue that this model can contribute to explain US vis a vis continental European perceptions about income inequality and choices of redistributive policies.
Keywords: fairness; redistribution; income inequality; social beliefs; equilibrium tax policies
JEL Codes: D7; E6; H1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Social beliefs about income inequality (D31) | Redistributive policies (H23) |
| Belief that effort determines income (D31) | Low taxation and redistribution policies (H29) |
| Low taxation and redistribution policies (H29) | High individual effort (D29) |
| Belief that luck determines income (D31) | High taxation and redistribution policies (H29) |
| High taxation and redistribution policies (H29) | Distorted individual incentives (H31) |
| Beliefs about fairness (D63) | Policy choices (D78) |
| Policy choices (D78) | Beliefs about fairness (D63) |
| Beliefs about fairness (D63) | Multiple equilibria (D59) |