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Unequal Societies

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  • Roland Benabou

Abstract

This paper aims to explain the significant variations in the social contract observed across nations. It shows how countries with similar technologies and preferences, as well as equally democratic political systems, can sustain very different average and marginal tax rates. Similarly, it provides an explanation for the striking difference between the US and European systems of education finance or health insurance. The underlying mechanism operates as follows. With imperfect credit and insurance markets some redistributive policies can have a positive effect on aggregate output, growth, or more generally ex-ante welfare. Examples considered here include social insurance, progressive taxation combined with investment subsidies, and public education. Aggregate efficiency gains imply very different political economy consequences from those of standard models: the extent of political support for such redistributive policies decreases with the degree of inequality, at least over some range. This can generate a negative correlation between inequality and growth, as found in the data, without the usual feature that transfers increase with inequality, which is not supported empirically. Moreover, capital market imperfections make future earning a function of current resources. Combined with the politics of redistribution this creates the potential for multiple steady-states, with mutually reinforcing high inequality and low redistribution, or vice-versa. Temporary shocks to the distribution of income or the political system can then have permanent effects.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5583.

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Date of creation: May 1996
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Publication status: published as (Published with new title- Unequal Societies: Income Distribution and the Social Contract) American Economic Review, Vol. 90, no. 1 (March 2000): 96-129.
Handle: RePEc:nbr:nberwo:5583

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Citations

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Cited by:
  1. Edward L. Glaeser & Jose Scheinkman & Andrei Shleifer, 2002. "The Injustice of Inequality," Harvard Institute of Economic Research Working Papers 1967, Harvard - Institute of Economic Research.
  2. Benabou, R., 1999. "Tax and Education Policy in a Heterogeneous Agent Economy: What Levels of Redistribution Maximize Growth and Efficiency?," Working Papers, C.V. Starr Center for Applied Economics, New York University 99-12, C.V. Starr Center for Applied Economics, New York University.
  3. Fernández, Raquel & Galí, Jordi, 1997. "To Each According To...? Markets, Tournaments, and the Matching Problem with Borrowing Constraints," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1627, C.E.P.R. Discussion Papers.
  4. Rafael Gomez & David K. Foot, 2002. "Age Structure, Income Distribution And Economic Growth," EUI-RSCAS Working Papers, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS) 36, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
  5. Ferreira, Francisco H. G., 1997. "Economic transition and the distributions of income and wealth," Policy Research Working Paper Series 1808, The World Bank.
  6. Gradstein, Mark, 2002. "Rules, stability, and growth," Journal of Development Economics, Elsevier, Elsevier, vol. 67(2), pages 471-484, April.
  7. Grüner, Hans Peter, 1999. "Inequality and Political Consensus," Discussion Paper Serie A 591, University of Bonn, Germany.
  8. Bingqin Li & David Piachaud, 2004. "Poverty and inequality and social policy in China," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 6303, London School of Economics and Political Science, LSE Library.
  9. Bingqin Li & David Piachaud, 2004. "Poverty and Inequality and Social Policy in China," CASE Papers, Centre for Analysis of Social Exclusion, LSE 087, Centre for Analysis of Social Exclusion, LSE.
  10. Murat F. Iyigun & Andrew T. Levin, 1998. "Macroeconomic implications of competitive college admissions," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 613, Board of Governors of the Federal Reserve System (U.S.).
  11. Anil Duman, 2010. "Risks in the labor market and social insurance preferences: Germany and the USA," International Journal of Social Economics, Emerald Group Publishing, vol. 37(2), pages 150-164, January.
  12. Birdsall, Nancy & Nellis, John, 2003. "Winners and Losers: Assessing the Distributional Impact of Privatization," World Development, Elsevier, Elsevier, vol. 31(10), pages 1617-1633, October.
  13. Sahar Bahmani & Miguel-Ángel Galindo & María Méndez, 2012. "Non-profit organizations, entrepreneurship, social capital and economic growth," Small Business Economics, Springer, Springer, vol. 38(3), pages 271-281, April.
  14. Bassett, William F. & Burkett, John P. & Putterman, Louis, 1999. "Income distribution, government transfers, and the problem of unequal influence," European Journal of Political Economy, Elsevier, vol. 15(2), pages 207-228, June.
  15. Riccarda Longaretti & Domenico Delli Gatti, 2002. "Monetary Policy and the Distribution of Wealth in a OLG Economy with Heterogeneous Agents, Money and Bequests," Working Papers, University of Milano-Bicocca, Department of Economics 60, University of Milano-Bicocca, Department of Economics, revised Oct 2002.

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