DP13107 Inequality Aversion, Populism, and the Backlash Against Globalization

Author(s): Lubos Pástor, Pietro Veronesi
Publication Date: August 2018
Date Revised: May 2020
Keyword(s): Brexit, Globalization, inequality, populism, Trump
JEL(s): D72, F65, G11, G12, G18, P16
Programme Areas: Public Economics, Financial Economics, International Trade and Regional Economics, International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13107

Motivated by the recent rise of populism in western democracies, we develop a tractable equilibrium model in which a populist backlash emerges endogenously in a strong economy. In the model, voters dislike inequality, especially the high consumption of ``elites." Economic growth exacerbates inequality due to heterogeneity in preferences, which generates heterogeneity in returns on capital. In response to rising inequality, rich-country voters optimally elect a populist promising to end globalization. Equality is a luxury good. Countries with more inequality, higher financial development, and trade deficits are more vulnerable to populism, both in the model and in the data.