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