Inequality and size of the government when voters have other regarding preferences

Sanjit Dhami and Ali al-Nowaihi ()

No 08/23, Discussion Papers in Economics from Division of Economics, School of Business, University of Leicester

Abstract: The celebrated relation between inequality and redistribution is based on selfish voters who care solely about own-payoffs. A growing empirical literature highlights the importance of other regarding preferences (ORP) in voting over redistribution. We reexamine the relation between inequality and redistribution, within a simple general equilibrium model, when voters have ORP. Our contribution is five-fold. First, we demonstrate the existence of a Condorcet winner. Second, poverty can lead to increased redistribution (which implies a countercyclical social spending to GDP ratio). Third, we show that disposable income 'strongly median-dominates' factor income. Fourth, we show that fair voters respond to an increase in 'strong median-dominance' by engaging in greater redistribution. Fifth, an illustrative empirical exercise using OECD data points to the importance of fairness in explaining redistribution.

Keywords: Redistribution; Other regarding preferences; Single crossing property; Income inequality; Difference dominance; Median dominance; American Exceptionalism. (search for similar items in EconPapers)
JEL-codes: D64 D72 D78 (search for similar items in EconPapers)
Date: 2008-07
New Economics Papers: this item is included in nep-cdm and nep-pol
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