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Politico economic consequences of rising income inequality

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Author Info

  • Dean Corbae
  • Pablo D'Erasmo
  • Burhanettin Kuruscu

    ()
    (Economics University of Texas at Austin)

Abstract

This paper develops a political economy model to evaluate how inequality affects policies via the political process. The model is an extension of Krusell and Rios-Rull (1999) to incorporate uninsured idiosyncratic risk to income. Using this framework, we evaluate the response of social insurance policies to rising income inequality. An important feature of dynamic political economy models that incorporate inequality is that policy outcomes affect the evolution of wealth distribution. At the same time, the distribution of wealth affects policy outcomes. These two features make it difficult to solve such models since distribution of wealth is generally a high dimensional object. We tackle this computational problem using the Krusell-Smith (1998) algorithm: we use the mean and the median of the wealth distribution to predict the evolution of prices and political outcomes.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 878.

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Date of creation: 03 Dec 2006
Date of revision:
Handle: RePEc:red:sed006:878

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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Web page: http://www.EconomicDynamics.org/society.htm
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Related research

Keywords: Inequality; politico - economic equilibrium;

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Cited by:
  1. Thomas F. Cooley & Elizabeth M. Caucutt & Nezih Guner, 2006. "The Farm, the City, and the Emergence of Social Security," Working Papers 06-21, New York University, Leonard N. Stern School of Business, Department of Economics.

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