Fairness and Redistribution: US versus Europe

Abstract

Different beliefs about how fair social competition is and what determines incomeinequality, inßuence the redistributive policy chosen democratically in a society. But the composition of income in the Þrst place depends on equilibrium tax policies. If a society believes that individual effort determines income, and that all have a right to enjoy the fruits of their effort, it will chose low redistribution and low taxes.In equilibrium, effort will be high, the role of luck limited, market outcomes will be quite fair, and social beliefs will be self-fulÞlled. If instead a society believes that luck, birth, connections and/or corruption determine wealth, it will tax a lot, thus distorting allocations and making these beliefs self-sustained as well. We show how this interaction between social beliefs and welfare policies may lead to multiple equilibria or multiple steady states. We argue that this model can contribute to explain US vis a vis continental European perceptions about income inequality and choices of redistributive policies. * This project was initiated by a lively discussion we had with Olivier Blanchard and Xavier Gabaix in February 2002. For helpful discussions and comments, we thank

The Scandinavian model—An interpretation

“…Our paper is part of a literature on comparing welfare states (Esping-Andersen, 1990;Rodrik, 1998), on the differences between Europe and the US (Alesina and Glaeser, 2004;Alesina and Angeletos, 2005), on countries with different wage setting institutions (Calmfors, 1990;Moene, Wallerstein, and Hoel, 1993), and on different varieties of capitalism (Hall and Soskice, 2001). We also connect to the literature discussing the rise and fall of the Scandinavian model, see Lundberg (1985), Lindbeck (1997), and the papers from the NBER project on reforming the Swedish welfare state (Freeman, Topel, and Swedenborg, 1997), and the literature on the pros and cons of the Scandinavian model, see Bosworth and Rivlin (1987), Olson (1990), and Layard (1991).…”

Do fairness and race matter in generosity? Evidence from a nationally representative charity experiment

“…1 Theoretical research on fairness and redistribution from the rich to the poor has focused on the role of beliefs about whether or not the poor are individually responsible for their own bad outcomes, i.e., whether the poor are lazy or industrious (Piketty, 1995;Alesina and Angeletos, 2005;Bénabou and Tirole, 2006). Empirically, people support more redistribution from the rich to the poor when they believe that poverty is caused by exogenous circumstances, as opposed to factors under volitional control.…”

Costs of taxation and the size of government

“…For example, one compelling hypothesis is that cross-country di¤erences in public policy has a deeper cultural determinants associated with cross-country variations in preferences. Alesina and his various coauthors (Alesina et al 2004;Alesina and Angeletos 2005;Alesina and La Ferrara 2005) …nd that preferences-or, the beliefs about the fairness of social competition (see also Kristov et al 1992)-can explain U.S. vis-a-vis continental European perceptions about income inequality and choices of redistributive policies. Such di¤erences will in turn be re ‡ected in the size and composition of government, and are hence a candidate explanation for the variation in public policy across countries.…”