Changing Social Contracts: Beliefs and Dissipative Inclusion in Brazil

Social contracts about inequality and redistribution are country-specific. We rely on a model of inequality and redistribution where multiple steady states can emerge in given country. We link the model to the recent literature on beliefs and argue that beliefs are a major determinant of which equilibrium results. We show that changes in beliefs may shift the equilibrium in a country over time. We present evidence that beliefs are typically very stable over time, yet argue that Brazil has recently undergone a dramatic shift in beliefs which we show is associated with a change in the country's social contract in the past thirty years. The transition from one social contract to another has taken place through a process which we call 'dissipative inclusion', where redistribution and social inclusion are effectively achieved but accompanied by distortions, inefficiencies and rent dissipation.