Janeway Institute Working Papers - Abstracts | The Cambridge-INET Institute

The Dynamics of Social Identity, Inequality and Redistribution

JIWP Number: 2320

Abstract: We provide a politico-economic theory of income redistribution with endogenous social identity of voters. Our analysis uncovers a non-monotonic relationship between market income inequality and redistributive taxation in line with the mixed evidence on the sign of their empirical relationship: taxation first increases with wage inequality as all voters identify with others, but then drops sharply as affluent voters switch to identify in-group. We further add ethnicity as an identification attribute. Consistent with existing empirical evidence, our model predicts that the presence of ethnic minorities and across ethnic group inequality reduce redistribution, while within ethnic group wage inequality increases it.

Keywords: Inequality, Probabilistic Voting, Redistribution, Social Class, Social Identity, Tax Rate