DP4159 Inequality and Political Consensus

Author(s): Hans Peter GrĂ¼ner
Publication Date: December 2003
Keyword(s): comparative statics in political economy, inequality, policy uncertainty, political concensus, representative democracy
JEL(s): C72, D31, D70, D72
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4159

This Paper develops a model of political consensus in order to explain the missing link between inequality and political redistribution. Political consensus is an implicit agreement not to vote for extreme policy proposals. We show that such an agreement may play an efficiency-enhancing role. Voters anticipate that voting for extremist parties increases policy uncertainty in the future. A political consensus among voters reduces policy uncertainty because self-interested politicians propose non-discriminatory policies. We study how much inequality can be sustained in a democracy and how the limits to redistribution vary with initial inequality. We find that the bounds of the set of political equilibria may react in a fundamentally different manner to changes in exogenous variables than do the policy variables in the one-dimensional, one-shot game. More initial inequality need not lead to more redistribution from the rich to the poor. The maximum amount of redistribution decreases with inequality if (and only if) agents are sufficiently patient. In this case inequality is politically self-sustaining.