Diversity and Redistribution

40 Pages Posted: 10 Oct 2005 Last revised: 12 Feb 2021

See all articles by Raquel Fernández

Raquel Fernández

New York University - Leonard N. Stern School of Business, Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Gilat Levy

London School of Economics & Political Science (LSE) - Department of Economics

Date Written: August 2005

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.

Suggested Citation

Fernández, Raquel and Levy, Gilat, Diversity and Redistribution (August 2005). NBER Working Paper No. w11570, Available at SSRN: https://ssrn.com/abstract=788435

Raquel Fernández (Contact Author)

New York University - Leonard N. Stern School of Business, Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Gilat Levy

London School of Economics & Political Science (LSE) - Department of Economics ( email )

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United Kingdom
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