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Published in: Social Choice and Welfare 3/2024

13-02-2024 | Original Paper

Redistributive politics under ambiguity

Author: Javier D. Donna

Published in: Social Choice and Welfare | Issue 3/2024

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Abstract

The conflicting views that agents and voters have about redistributive taxation have been broadly studied. The literature has focused on situations where the counterfactual outcomes that would have occurred had other actions been chosen are observable or point identified. I analyze this problem from an econometric standpoint, in a context of ambiguity. The extent to which individuals are responsible for their own fate is partially identified. Agents have partial knowledge of the relative importance of effort in the generation of income inequality and, therefore, the magnitude of the incentive costs. I present a simple model of redistribution and show that multiple equilibria might arise even in the presence of ambiguity: One where the rate of redistribution is high, agents are pessimistic, and exert low effort (Pessimism/Welfare State), and another where the redistribution tax rate is low, agents are optimistic, and exert high effort (Optimism/Laissez Faire).

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Appendix
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Footnotes
1
See, e.g. Romer (1975), Meltzer and Richard (1981), Piketty (1995), Alesina et al. (2001), Alesina and Angeletos (2005a), Alesina and Angeletos (2005b), Benabou and Tirole (2006), and the references therein.
 
2
See, e.g. Di Tella and MacCulloch (2009) and the references therein.
 
3
See Stokes (2001) and Lora and Olivera (2004).
 
4
See AGS and Alesina and Glaeser (2004) for comprehensive reviews of the literature.
 
5
These ideas date back to Keynes (1921) and Knight (1921). The term ambiguity goes back to Ellsberg (1961).
 
6
Using the law of iterated expectations and \(y\in \{y_0,y_1\}\):
$$\begin{aligned} \begin{aligned} \beta&:= \mathbb {E}[y_j(e_H)],\\&=\mathbb {E}[y_j(e_j)|e_j=e_H]\mathbb {P}(e_j=e_H)+\mathbb {E}[y_j(e_j)|e_j \ne e_H]\mathbb {P}(e_j \ne e_H),\\&\in [\underbrace{\mathbb {E}[y_j(e_j)|e_j=e_H]\mathbb {P}(e_j=e_H)+y_0\mathbb {P}(e_j \ne e_H)}_{\beta _L},\underbrace{\mathbb {E}[y_j(e_j)|e_j=e_H]\mathbb {P}(e_j=e_H)+y_1\mathbb {P}(e_j \ne e_H)}_{\beta _U}]. \end{aligned} \end{aligned}$$
 
7
The specification of the production function and agents’ utility are similar to Piketty (1995) and Benabou and Tirole (2006). The main difference is that I consider the ambiguity context described above.
 
8
An alternative approach would be to solve the model using the Hurwicz criterion without introducing the cognitive technology and treating \(\lambda\) as an exogenous parameter that is drawn from some distribution. The conclusions from the following section still hold, but the degree of pessimism, \(\lambda\), is exogenous.
 
9
I call this period 0 to emphasize that this decision may or may not be conscious.
 
10
As explained below, if the median voter is always extremely pessimistic, then the optimal effort is always zero, as in the maximin criterion, regardless of the tax and the redistribution.
 
11
A natural question that might arise is whether the main result of the paper—the possibility of multiple equilibria—can also be obtained using other criteria, such as the ones discussed in the introduction and concluding remarks. I hypothesize that the answer is “yes” if the optimal effort solution is fractional, although one might have to make some simplifying technical assumptions, such as the ones in the paper. However, I have only proved Proposition 1 under the criteria discussed in this section.
 
12
Downloaded from Enrico Tabellini’s webpage available at (accessed on April 21, 2022): https://​didattica.​unibocconi.​it/​mypage/​index.​php?​IdUte=​48805 &​idr=​4273. File name: 60panel_26maj.dta.
 
13
Downloaded from the World Values Survey’s webpage available at (accessed on April 21, 2022): https://​www.​worldvaluessurve​y.​org/​WVSEVStrend.​jsp and https://​search.​gesis.​org/​research_​data/​ZA7503?​doi=​10.​4232/​1.​13736. File names: WVS.dta and EVS.dta, respectively, under datasets on the webpages.
 
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Metadata
Title
Redistributive politics under ambiguity
Author
Javier D. Donna
Publication date
13-02-2024
Publisher
Springer Berlin Heidelberg
Published in
Social Choice and Welfare / Issue 3/2024
Print ISSN: 0176-1714
Electronic ISSN: 1432-217X
DOI
https://doi.org/10.1007/s00355-023-01500-3

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