The median-voter hypothesis, income inequality, and income redistribution: an empirical test with the required data

doi:10.1016/S0176-2680(00)00014-8

European Journal of Political Economy

Volume 16, Issue 3, September 2000, Pages 367-410

https://doi.org/10.1016/S0176-2680(00)00014-8 Get rights and content

Abstract

The median-voter hypothesis has been central to an extensive literature on consequences of income redistribution. For example, it has been proposed that greater inequality is associated with lower growth, because of the greater redistribution that is sought by the median voter when income distribution is less equal. There have however been no proper tests of the median-voter hypothesis concerning redistribution, because of previous absence of data on factor-income distribution (that is, incomes before taxes and transfers) across households, and thus on the gains by poorer households from redistribution. The study reported in this paper is based on the required data, with 79 observations drawn from household budget surveys from 24 democracies. The results strongly support the conclusion that countries with greater inequality of factor income redistribute more to the poor. This is so even when we control for the share of the elderly in the population and for pension transfers. The evidence that the median-voter hypothesis adequately describes the collective-choice mechanism is however considerably weaker. Although middle-income groups gain more/or lose less through redistribution in countries where initial (factor) income distribution is more unequal, this regularity is all but lost when, by excluding pensions, we look only at explicit redistributive social transfers from which middle classes contemporaneously gain little. This leaves us searching for an alternative explanation: do middle-classes gain from transfers in the long run even if not contemporaneously?; or is the median-voter hypothesis, based on direct democracy, a proper representation of the mechanisms of collective decision making in representative democracy?

Section snippets

Setting the problem: the link between inequality and redistribution

A key relationship in the literature on inequality and growth (see Perotti, 1992, Perotti, 1993, Persson and Tabellini, 1994, Bertola, 1993, Alesina and Rodrik, 1994, Alesina and Perotti, 1994) concerns the link between market-generated income inequality and the extent of redistribution. In Perotti's (1996, pp. 151) extensive empirical review of the theories linking growth, income distribution, and democracy, this relationship appears under the title of an “endogenous fiscal policy approach”.

Description of the database

I used data for 24 countries that were, with two exceptions, democracies at the time of the surveys.⁴

Testing the redistribution hypothesis

As pointed out in Section 1, the relationship that we should test is Eq. (2).

We shall use two variables to indicate the extent of redistribution: how the share of (i) the bottom half and of (ii) the bottom quintile (ranked by factor income or factor P income) increases when we move from factor (or factor P) to disposable income — the variables displayed in Table 4, Table 5.¹⁶

Testing the median-voter hypothesis

Our results so far suggest a process of redistribution that is positively associated with initial inequality in factor incomes. This is simply an empirical finding. The further question is why such particular redistribution should occur? The median-voter hypothesis provides one possible explanation. This hypothesis, in its most abstract version, posits that, if preferences are single-peaked, the median voter will decisively determine the level of redistribution, by selecting the tax rate, and

Conclusions

The purpose of this study has been twofold: (1) to test the hypothesis of an inverse relationship between inequality in distribution of factor income and redistribution, and (2) to test one possible explanation for redistribution, the political collective-choice mechanism through the median-voter hypothesis.

The approach taken in the paper is novel, in that, for the first time, both the median-voter hypothesis and the dependent and the independent variables in the redistribution equations are

Acknowledgements

I thank Costas Krouskas and Yvonne Ying for excellent research assistance. Roberta Gatti, Mark Gradstein, Arye L. Hillman, Phil Keefer, Mattias Lundberg, Louis Putterman, Martin Ravallion, Tine Stanovnik, Heinrich Ursprung, two anonymous referees, as well as the participants of the 1999 Silvaplana Workshop on Political Economy and the World Bank Inequality Thematic Group where the paper was presented, provided many useful comments. The research was financed by a World Bank Research Grant RPO

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The median-voter hypothesis, income inequality, and income redistribution: an empirical test with the required data

Abstract

Section snippets

Setting the problem: the link between inequality and redistribution

Description of the database

Testing the redistribution hypothesis

Testing the median-voter hypothesis

Conclusions

Acknowledgements

European Journal of Political Economy

Journal of Monetary Economics

European Economic Review

The political economy of growth: a critical survey of the recent literature

The World Bank Economic Review

Distributive politics and economic growth

Quarterly Journal of Economics

Factor shares and savings in endogenous growth

American Economic Review

The Three Worlds Of Welfare Capitalism