The Political Economy of Earnings Mobility and Redistribution Policy

Ryo Arawatari and Tetsuo Ono

No 08-18-Rev, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: This paper presents a politico-economic model including a mutual link between earnings mobility and redistribution policy affected by human capital risk. A lowrisk economy produces multiple equilibria: a poor-majority equilibrium with lower mobility and higher redistribution and a rich-majority equilibrium with higher mobility and lower redistribution. In contrast, a high-risk economy produces a unique, poor-majority equilibrium with high mobility and low redistribution, which supports the POUM (prospect of upward mobility) hypothesis. In the latter economy, a further increase in risk may improve the expected utility of agents.

Keywords: earnings mobility; political economy; stationary Markov perfect equilibrium; redistribution (search for similar items in EconPapers)
JEL-codes: D72 H55 I38 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2008-04, Revised 2009-04
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Persistent link: https://EconPapers.repec.org/RePEc:osk:wpaper:0818r

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