Perceptions of Inequality and Redistribution: A Note

Roberto Iacono () and Marco Ranaldi ()
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Roberto Iacono: NTNU - Norwegian University of Science and Technology [Trondheim] - NTNU - Norwegian University of Science and Technology
Marco Ranaldi: UP1 - Université Paris 1 Panthéon-Sorbonne, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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Abstract: This paper shows that perceptions of inequality are a key factor in the formation of preferences for redistribution and thereby in the determination of the equilibrium redistribution level. We build on the novel stylized facts provided by the recent empirical and experimental literature on perceptions of income inequality. In brief, the emerging consensus is that agents incorrectly estimate the shape of the income distribution because of limited information. Agents with income above the mean believe they are poorer than they actually are, and agents with income below the mean believe themselves to be richer. We revisit the standard framework on the political economy of redistribution and extend it in two ways. First, we assume a more general two-sided inequality aversion. Second, we incorporate perceptions of income inequality in the model. We show analytically that the equilibrium redistribution level is crucially determined by the interplay between the information treatment correcting the bias in perceptions of inequality and fairness considerations specified by the degree of inequality aversion. By doing this, we add (biased) perceptions of inequality to the list of potential factors explaining why, notwithstanding high levels of inequality, in many countries, an increase in the desire for redistribution has not been observed.

Keywords: Meltzer-Richard Model; Perceived Inequality; Inequality Aversion; Redistributive Preferences (search for similar items in EconPapers)
Date: 2019-01
New Economics Papers: this item is included in nep-ltv and nep-upt
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-02042330v1
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Published in 2019

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-02042330

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