A Theory of Ethnic Diversity and Income Distribution

In this paper, how the two dimensions of heterogeneity of people in society, income disparity and ethnic diversity, affect the reallocation of the income is examined. Specifically a legislative bargaining model is constructed to investigate how the political parties whose platforms are distinguished by ethnicity and income group, form a coalition and enter a government to implement their preferred fiscal policy is analyzed. The result of the model suggests, that the preferred partner for coalition is the group with smaller population size (cheaper to buy) and lower income level (easier to tax). Combined with the idea of Kuznets curve, this result suggests that in poor countries ethnic coalitions tend to occur and in the middle and high income countries, class coalitions are likely to occur. Further I extend the model such that the member in the coalition gets per-capita transfer equally to overcome the shortcomings of the conventional model. The extended model shows that if the rich is in the majority, forming an oversized coalition might be the optimal strategy, which is consistent with empirical findings in some developed countries, such as Denmark or Sweden.