Citation

Discussion Paper Details

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Title: Unequal Societies

Author(s): Roland B�nabou

Publication Date: June 1996

Keyword(s): Education Finance, Income Distribution, Inequality, Political Economy, Social Contract, Taxation and Welfare State

Programme Area(s): International Macroeconomics

Abstract: This paper seeks to explain the significant variations in the social contract observed across nations. It shows how countries with similar technologies and preferences, as well as equally democratic political systems, can sustain very different average and marginal tax rates. Similarly, it provides an explanation for the striking difference between the US and European systems of education finance and health insurance. With imperfect credit and insurance markets some redistributive policies can have a positive effect on output, growth, or more generally ex-ante welfare. Aggregate efficiency gains, in turn, imply a very different political economy from that of standard models: the extent of political support for such redistributions decreases with the degree of inequality, at least over some range. Moreover, capital market imperfections make future earning a function of current resources. Hence there exists potential for multiple steady states, with mutually reinforcing high inequality and low redistribution, or vice versa. Temporary shocks to the distribution of income or the political system can then have permanent effects.

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Bibliographic Reference

B�nabou, R. 1996. 'Unequal Societies'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1419