EC302 Political Economics

Lecture 7: Redistributive politics

Prof. Ronny Razin

November 2010

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Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

Three groups in society.

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Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

Three groups in society.

Before tax income of group j voter is yj = θ j e + w . where e is e¤ort
and θ j is productivity (di¤ers between groups j)

Razin (LSE) EC319 11/10 2 / 25

Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

Three groups in society.

Before tax income of group j voter is yj = θ j e + w . where e is e¤ort
and θ j is productivity (di¤ers between groups j)
Cost of e¤ort e2
2

Razin (LSE) EC319 11/10 2 / 25

Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

Three groups in society.

Before tax income of group j voter is yj = θ j e + w . where e is e¤ort
and θ j is productivity (di¤ers between groups j)
2
Cost of e¤ort e2
Poor, θ p = 0,

Razin (LSE) EC319 11/10 2 / 25

Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

Three groups in society.

Before tax income of group j voter is yj = θ j e + w . where e is e¤ort
and θ j is productivity (di¤ers between groups j)
2
Cost of e¤ort e2
Poor, θ p = 0,
MC, θ mc = θ,

Razin (LSE) EC319 11/10 2 / 25

Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

Three groups in society.

Before tax income of group j voter is yj = θ j e + w . where e is e¤ort
and θ j is productivity (di¤ers between groups j)
2
Cost of e¤ort e2
Poor, θ p = 0,
MC, θ mc = θ,
Rich, θ r = 1,

Razin (LSE) EC319 11/10 2 / 25

Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

Taxes: Pure redistribution, (t, T )

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Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

Taxes: Pure redistribution, (t, T )

Each individual pays tyj taxes.

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Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

Taxes: Pure redistribution, (t, T )

Each individual pays tyj taxes.
Each individual gets T in lumpsum from governement.

Razin (LSE) EC319 11/10 3 / 25

Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

Taxes: Pure redistribution, (t, T )

Each individual pays tyj taxes.
Each individual gets T in lumpsum from governement.
t (y +y +y )
T = p 3mc r

Razin (LSE) EC319 11/10 3 / 25

Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

Taxes: Pure redistribution, (t, T )

Each individual pays tyj taxes.
Each individual gets T in lumpsum from governement.
t (y +y +y )
T = p 3mc r
t (yp +ymc +yr )
A = f(t, T )j t 2 [0, 1] and T = 3 g

Razin (LSE) EC319 11/10 3 / 25

Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

Taxes: Pure redistribution, (t, T )

Each individual pays tyj taxes.
Each individual gets T in lumpsum from governement.
t (y +y +y )
T = p 3mc r
t (yp +ymc +yr )
A = f(t, T )j t 2 [0, 1] and T = 3 g
Single peaked preferences?

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Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

Ecah individual maximises his utility by choosing e¤ort level.

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Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

Ecah individual maximises his utility by choosing e¤ort level.

maxe ((1 t )θ i e e2 )
2

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Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

Ecah individual maximises his utility by choosing e¤ort level.

maxe ((1 t )θ i e e2 )
2
f.o.c (1 t )θ i = e

Razin (LSE) EC319 11/10 4 / 25

Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

Ecah individual maximises his utility by choosing e¤ort level.

maxe ((1 t )θ i e e2 )
2
f.o.c (1 t )θ i = e

Before tax income, y (t )

Razin (LSE) EC319 11/10 4 / 25

Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

Ecah individual maximises his utility by choosing e¤ort level.

maxe ((1 t )θ i e e2 )
2
f.o.c (1 t )θ i = e

Before tax income, y (t )

Poor, w

Razin (LSE) EC319 11/10 4 / 25

Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

Ecah individual maximises his utility by choosing e¤ort level.

maxe ((1 t )θ i e e2 )
2
f.o.c (1 t )θ i = e

Before tax income, y (t )

Poor, w
MC, w + θ 2 (1 t)

Razin (LSE) EC319 11/10 4 / 25

Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

Ecah individual maximises his utility by choosing e¤ort level.

maxe ((1 t )θ i e e2 )
2
f.o.c (1 t )θ i = e

Before tax income, y (t )

Poor, w
MC, w + θ 2 (1 t )
Rich, w + (1 t )

Razin (LSE) EC319 11/10 4 / 25

Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

Ecah individual maximises his utility by choosing e¤ort level.

maxe ((1 t )θ i e e2 )
2
f.o.c (1 t )θ i = e

Before tax income, y (t )

Poor, w
MC, w + θ 2 (1 t )
Rich, w + (1 t )
Average income

3w + (1 t )(1 + θ 2 ) (1 t )
ȳ (t ) = =w+ (1 + θ 2 )
3 3

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Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

After tax income,

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Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

After tax income,

Poor, (1 t )w + t ȳ (t )

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Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

After tax income,

Poor, (1 t )w + t ȳ (t )
MC, (1 t )(w + θ 2 (1 t )) + t ȳ (t )

Razin (LSE) EC319 11/10 5 / 25

Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

After tax income,

Poor, (1 t )w + t ȳ (t )
MC, (1 t )(w + θ 2 (1 t )) + t ȳ (t )
Rich, (1 t )(w + (1 t )) + t ȳ (t )

Razin (LSE) EC319 11/10 5 / 25

Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

After tax income,

Poor, (1 t )w + t ȳ (t )
MC, (1 t )(w + θ 2 (1 t )) + t ȳ (t )
Rich, (1 t )(w + (1 t )) + t ȳ (t )

We will assume that individual preferences over tax schemes is

represented by their after tax incomes minus the cost of e¤ort.

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Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

But let’s take a closer look at the ideal points.

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Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

But let’s take a closer look at the ideal points.

(ei (t ))2
Ui (t ) = Ui (yiAT (t ), ei (t )) = yiAT (t )
2

Razin (LSE) EC319 11/10 6 / 25

Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

But let’s take a closer look at the ideal points.

(ei (t ))2
Ui (t ) = Ui (yiAT (t ), ei (t )) = yiAT (t )
2

yiAT (t ) = (1 t )yi (t ) + T (t ) = (1 t )yi (t ) + t ȳ (t )

Razin (LSE) EC319 11/10 6 / 25

Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

But let’s take a closer look at the ideal points.

(ei (t ))2
Ui (t ) = Ui (yiAT (t ), ei (t )) = yiAT (t )
2

yiAT (t ) = (1 t )yi (t ) + T (t ) = (1 t )yi (t ) + t ȳ (t )

F.O.C:
∂Ui (t ) ∂Ui (t ) ∂yiAT (t ) ∂Ui (t ) ∂ei (t )
= AT + =0
∂t ∂yi (t ) ∂t ∂ei (t ) ∂t

Razin (LSE) EC319 11/10 6 / 25

Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

∂Ui (t ) ∂Ui (t ) ∂yiAT (t ) ∂Ui (t ) ∂ei (t )

= AT +
∂t ∂yi (t ) ∂t ∂ei (t ) ∂t

Razin (LSE) EC319 11/10 7 / 25

Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

∂Ui (t ) ∂Ui (t ) ∂yiAT (t ) ∂Ui (t ) ∂ei (t )

= AT +
∂t ∂yi (t ) ∂t ∂ei (t ) ∂t

Envelope Theorem:

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Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

∂Ui (t ) ∂Ui (t ) ∂yiAT (t ) ∂Ui (t ) ∂ei (t )

= AT +
∂t ∂yi (t ) ∂t ∂ei (t ) ∂t

Envelope Theorem:
∂U i (t )
∂e i (t )
= 0, why?

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Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

∂Ui (t ) ∂Ui (t ) ∂yiAT (t ) ∂Ui (t ) ∂ei (t )

= AT +
∂t ∂yi (t ) ∂t ∂ei (t ) ∂t

Envelope Theorem:
∂U i (t )
= 0, why?
∂e i (t )
This is the f.o.c for maximising utility!

Razin (LSE) EC319 11/10 7 / 25

Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

∂Ui (t ) ∂Ui (t ) ∂yiAT (t ) ∂Ui (t ) ∂ei (t )

= AT +
∂t ∂yi (t ) ∂t ∂ei (t ) ∂t

Envelope Theorem:
∂U i (t )
= 0, why?
∂e i (t )
This is the f.o.c for maximising utility!

Therefore
∂Ui (t ) ∂Ui (t ) ∂yiAT (t )
= AT
∂t ∂yi (t ) ∂t

Razin (LSE) EC319 11/10 7 / 25

Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

∂Ui (t ) ∂Ui (t ) ∂yiAT (t )

= AT =0
∂t ∂yi (t ) ∂t

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Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

∂Ui (t ) ∂Ui (t ) ∂yiAT (t )

= AT =0
∂t ∂yi (t ) ∂t

yiAT (t ) = (1 t )yi (t ) + T (t ) = (1 t )yi (t ) + t ȳ (t )

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Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

∂Ui (t ) ∂Ui (t ) ∂yiAT (t )

= AT =0
∂t ∂yi (t ) ∂t

yiAT (t ) = (1 t )yi (t ) + T (t ) = (1 t )yi (t ) + t ȳ (t )

(ei (t ))2
Ui (t ) = Ui (yiAT (t ), ei (t )) = yiAT (t )
2

Razin (LSE) EC319 11/10 8 / 25

Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

∂Ui (t ) ∂Ui (t ) ∂yiAT (t )

= AT =0
∂t ∂yi (t ) ∂t

yiAT (t ) = (1 t )yi (t ) + T (t ) = (1 t )yi (t ) + t ȳ (t )

(ei (t ))2
Ui (t ) = Ui (yiAT (t ), ei (t )) = yiAT (t )
2

∂Ui (t ) ∂yiAT (t ) ∂ȳ (t )

= = yi (t ) + ȳ (t ) + t i =0
∂t ∂t ∂t
ȳ (t ) yi (t )
) t i = ∂ȳ (t )
∂t

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Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

i ȳ (t ) yi (t )
t = ∂ȳ (t )
∂t

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Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

i ȳ (t ) yi (t )
t = ∂ȳ (t )
∂t

The ideal points, t i , are increasing in ȳ (t ) yi (t ).

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Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

i ȳ (t ) yi (t )
t = ∂ȳ (t )
∂t

The ideal points, t i , are increasing in ȳ (t ) yi (t ).

The median is the Middle class.

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Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

i ȳ (t ) yi (t )
t = ∂ȳ (t )
∂t

The ideal points, t i , are increasing in ȳ (t ) yi (t ).

The median is the Middle class.

Black’s median voter Theorem:

M ȳ (t ) ymedian (t )
t = ∂ȳ (t )
∂t

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Majority Rule Institutions
The Meltzer-Richards model of redistribution politics

i ȳ (t ) yi (t )
t = ∂ȳ (t )
∂t

The ideal points, t i , are increasing in ȳ (t ) yi (t ).

The median is the Middle class.

Black’s median voter Theorem:

M ȳ (t ) ymedian (t )
t = ∂ȳ (t )
∂t

ȳ (t ) yi (t ) what is it in reality?

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The data below is taken from the Institute for Fiscal Studies and is based
on a household with two adults and no children for 2006.

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The Meltzer-Richards model of redistribution politics
Empirical research

Empirical validity of the Melzer-Richards model:

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The Meltzer-Richards model of redistribution politics
Empirical research

Empirical validity of the Melzer-Richards model:

Meltzer and Richard (1993) started up the empirical tests of the
hypothesis in an analysis of US time series data of government
spending. They conclude that the spending level is negatively related
to the ratio of median to mean income.

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The Meltzer-Richards model of redistribution politics
Empirical research

Empirical validity of the Melzer-Richards model:

Meltzer and Richard (1993) started up the empirical tests of the
hypothesis in an analysis of US time series data of government
spending. They conclude that the spending level is negatively related
to the ratio of median to mean income.
It is hard to get away from the observation that many countries with
equal income distribution have large government spending, notably
the Scandinavians, while many countries with
unequal income distribution have smaller public sectors, as in many
developing countries.

Razin (LSE) EC319 11/10 11 / 25

The Meltzer-Richards model of redistribution politics
Empirical research

Empirical validity of the Melzer-Richards model:

Meltzer and Richard (1993) started up the empirical tests of the
hypothesis in an analysis of US time series data of government
spending. They conclude that the spending level is negatively related
to the ratio of median to mean income.
It is hard to get away from the observation that many countries with
equal income distribution have large government spending, notably
the Scandinavians, while many countries with
unequal income distribution have smaller public sectors, as in many
developing countries.
But, cross-country studies of the relationship are less conclusive.

Razin (LSE) EC319 11/10 11 / 25

The Meltzer-Richards model of redistribution politics
Empirical research

Empirical validity of the Melzer-Richards model:

Meltzer and Richard (1993) started up the empirical tests of the
hypothesis in an analysis of US time series data of government
spending. They conclude that the spending level is negatively related
to the ratio of median to mean income.
It is hard to get away from the observation that many countries with
equal income distribution have large government spending, notably
the Scandinavians, while many countries with
unequal income distribution have smaller public sectors, as in many
developing countries.
But, cross-country studies of the relationship are less conclusive.
The empirical cross-country analyses has been extended to economic
growth.

Razin (LSE) EC319 11/10 11 / 25

The Meltzer-Richards model of redistribution politics
Empirical research

Empirical validity of the Melzer-Richards model:

Meltzer and Richard (1993) started up the empirical tests of the
hypothesis in an analysis of US time series data of government
spending. They conclude that the spending level is negatively related
to the ratio of median to mean income.
It is hard to get away from the observation that many countries with
equal income distribution have large government spending, notably
the Scandinavians, while many countries with
unequal income distribution have smaller public sectors, as in many
developing countries.
But, cross-country studies of the relationship are less conclusive.
The empirical cross-country analyses has been extended to economic
growth.
The evidence suggests that income inequality reduces economic
growth, but the link via taxation is not documented.

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The Piketty model of redistribution politics
Motivation

Why is there so much hetrogeneity between countries in terms of

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The Piketty model of redistribution politics
Motivation

Why is there so much hetrogeneity between countries in terms of

Income inequality,

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The Piketty model of redistribution politics
Motivation

Why is there so much hetrogeneity between countries in terms of

Income inequality,
Redisitribution schemes.

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The Piketty model of redistribution politics
Motivation

Why is there so much hetrogeneity between countries in terms of

Income inequality,
Redisitribution schemes.
Attitudes towards redistribution?

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 Figure I: Beliefs and Policies (source: Alesina, Glaser and Sacerdote (2001))

perceptions of the link between “money and happiness” and the related dichotomy observed
between consumerist and leisurist societies. The second is the affective (anxiety-reducing) di-
mension of just-world beliefs, which can play a similar role to that of the functional, motivation-
related one. The third is religion, that is, beliefs about the likelihood of an afterlife and the
nature of its rewards and punishments.

I Self-reliance and redistribution

The extent of direct and indirect redistribution —through taxes and transfers, social insurance,
education finance and labor market regulation— differs remarkably across advanced democracies,
as epitomized by the contrast between the United States and Europe. While there are potential
explanations for this puzzle that do not involve differences in beliefs about the causes of wealth
and poverty (e.g., Bénabou [2000], Alesina and Glaeser [2004]), considerable evidence suggests
that citizens’ views on the role of self-reliance versus societal factors do play a major role.1
1. Importance of beliefs. Data from the World Values Survey [Alesina et al., 2001; Keely,

1
Models stressing the role of beliefs about social mobility include Hirschman and Rothschild [1973], Piketty
[1995, 1998], Bénabou and Ok [2001], Rotemberg [2002] and Alesina and Angeletos [2005]. An alternative class
of theories emphasizes how welfare states and laissez-faire societies can arise as multiple steady-states from the
joint dynamics of the wealth distribution and redistributive policies [Bénabou, 2000, 2005; Saint-Paul, 2001;
Hassler et al., 2002; Desdoigts and Moizeau, 2005]. A third line of explanation points to differences in political
institutions, such as a centralized versus a federal state, or in more exogenous national factors, particularly ethnic
heterogeneity; see Alesina et al. [2001] and Alesina and Glaeser [2004] for comprehensive overviews.

2
The Piketty model of redistribution politics
Motivation

Attitudes as beliefs about:

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The Piketty model of redistribution politics
Motivation

Attitudes as beliefs about:

The role of luck in success versus e¤ort

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The Piketty model of redistribution politics
Motivation

Attitudes as beliefs about:

The role of luck in success versus e¤ort
The role that an individual background plays in his success level

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The Piketty model of redistribution politics
Motivation

Attitudes as beliefs about:

The role of luck in success versus e¤ort
The role that an individual background plays in his success level

If attitudes are about information,

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The Piketty model of redistribution politics
Motivation

Attitudes as beliefs about:

The role of luck in success versus e¤ort
The role that an individual background plays in his success level

If attitudes are about information,

surely we will learn in the end about the role of luck and social
circumstances,

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The Piketty model of redistribution politics
Motivation

Attitudes as beliefs about:

The role of luck in success versus e¤ort
The role that an individual background plays in his success level

If attitudes are about information,

surely we will learn in the end about the role of luck and social
circumstances,
How can di¤erences between individuals and countries still be
sustained?

Razin (LSE) EC319 11/10 13 / 25

The Piketty model of redistribution politics
Motivation

Attitudes as beliefs about:

The role of luck in success versus e¤ort
The role that an individual background plays in his success level

If attitudes are about information,

surely we will learn in the end about the role of luck and social
circumstances,
How can di¤erences between individuals and countries still be
sustained?
Is e¤ort really more importnat in the US?

Razin (LSE) EC319 11/10 13 / 25

The Piketty model of redistribution politics
The Model

An in…nite horizon model.

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The Piketty model of redistribution politics
The Model

An in…nite horizon model.

People belong to dynasties, an individual inherents the beliefs
(attitudes) of his parents.

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The Piketty model of redistribution politics
The Model

An in…nite horizon model.

People belong to dynasties, an individual inherents the beliefs
(attitudes) of his parents.
People live for one period in which they work, pay taxes, and vote on
taxes for the next period.

Razin (LSE) EC319 11/10 14 / 25

The Piketty model of redistribution politics
The Model

An in…nite horizon model.

People belong to dynasties, an individual inherents the beliefs
(attitudes) of his parents.
People live for one period in which they work, pay taxes, and vote on
taxes for the next period.
After they work, they observe whether they were succesful or not,

Razin (LSE) EC319 11/10 14 / 25

The Piketty model of redistribution politics
The Model

An in…nite horizon model.

People belong to dynasties, an individual inherents the beliefs
(attitudes) of his parents.
People live for one period in which they work, pay taxes, and vote on
taxes for the next period.
After they work, they observe whether they were succesful or not,
they update their additudes towards redistribution

Razin (LSE) EC319 11/10 14 / 25

The Piketty model of redistribution politics
The Model

An in…nite horizon model.

People belong to dynasties, an individual inherents the beliefs
(attitudes) of his parents.
People live for one period in which they work, pay taxes, and vote on
taxes for the next period.
After they work, they observe whether they were succesful or not,
they update their additudes towards redistribution
They vote over taxes for their children.

Razin (LSE) EC319 11/10 14 / 25

The Piketty model of redistribution politics
The Model

An income of an individual of dynasty i from period t, yi ,t , can be

high or low.

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The Piketty model of redistribution politics
The Model

An income of an individual of dynasty i from period t, yi ,t , can be

high or low.
Pr(yi ,t highjyi ,t 1 high) = π high + θe

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The Piketty model of redistribution politics
The Model

An income of an individual of dynasty i from period t, yi ,t , can be

high or low.
Pr(yi ,t highjyi ,t 1 high) = π high + θe
Pr(yi ,t highjyi ,t 1 low) = π low + θe

Razin (LSE) EC319 11/10 15 / 25

The Piketty model of redistribution politics
The Model

An income of an individual of dynasty i from period t, yi ,t , can be

high or low.
Pr(yi ,t highjyi ,t 1 high) = π high + θe
Pr(yi ,t highjyi ,t 1 low) = π low + θe

Social background/discrimination- π high π low .

Razin (LSE) EC319 11/10 15 / 25

The Piketty model of redistribution politics
The Model

An income of an individual of dynasty i from period t, yi ,t , can be

high or low.
Pr(yi ,t highjyi ,t 1 high) = π high + θe
Pr(yi ,t highjyi ,t 1 low) = π low + θe

Social background/discrimination- π high π low .

The role of e¤ort in success- θ

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The Piketty model of redistribution politics
The Model

True state of nature: π high , π low , θ .

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The Piketty model of redistribution politics
The Model

True state of nature: π high , π low , θ .

One could explain di¤erences between countries as di¤erences in these
parameters.

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The Piketty model of redistribution politics
The Model

True state of nature: π high , π low , θ .

One could explain di¤erences between countries as di¤erences in these
parameters.
Is this convincing?

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The Piketty model of redistribution politics
The Model

True state of nature: π high , π low , θ .

One could explain di¤erences between countries as di¤erences in these
parameters.
Is this convincing?
We will assume that all countries have the same parameters and will
still have hetrogeneity of attitudes.

Razin (LSE) EC319 11/10 16 / 25

The Piketty model of redistribution politics
The Model

Individuals, hold beliefs, µi ,t , about π high , π low , θ.

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The Piketty model of redistribution politics
The Model

Individuals, hold beliefs, µi ,t , about π high , π low , θ.

We start with some distribution of beliefs in society.

Razin (LSE) EC319 11/10 17 / 25

The Piketty model of redistribution politics
The Model

Individuals, hold beliefs, µi ,t , about π high , π low , θ.

We start with some distribution of beliefs in society.
Each period t,

Razin (LSE) EC319 11/10 17 / 25

The Piketty model of redistribution politics
The Model

Individuals, hold beliefs, µi ,t , about π high , π low , θ.

We start with some distribution of beliefs in society.
Each period t,
an individual chooses e¤ort- which in‡uences his success according to
the true θ .

Razin (LSE) EC319 11/10 17 / 25

The Piketty model of redistribution politics
The Model

Individuals, hold beliefs, µi ,t , about π high , π low , θ.

We start with some distribution of beliefs in society.
Each period t,
an individual chooses e¤ort- which in‡uences his success according to
the true θ .
Success wiull also depend on his parents success- on the true
π high , π low .

Razin (LSE) EC319 11/10 17 / 25

The Piketty model of redistribution politics
The Model

Individuals, hold beliefs, µi ,t , about π high , π low , θ.

We start with some distribution of beliefs in society.
Each period t,
an individual chooses e¤ort- which in‡uences his success according to
the true θ .
Success wiull also depend on his parents success- on the true
π high , π low .
But he doesn’t know π high , π low and θ .

Razin (LSE) EC319 11/10 17 / 25

The Piketty model of redistribution politics
The Model

Individuals, hold beliefs, µi ,t , about π high , π low , θ.

We start with some distribution of beliefs in society.
Each period t,
an individual chooses e¤ort- which in‡uences his success according to
the true θ .
Success wiull also depend on his parents success- on the true
π high , π low .
But he doesn’t know π high , π low and θ .
Therefore, observing his success will reveal information about
π high , π low and θ .

Razin (LSE) EC319 11/10 17 / 25

The Piketty model of redistribution politics
The Model

Individuals, hold beliefs, µi ,t , about π high , π low , θ.

We start with some distribution of beliefs in society.
Each period t,
an individual chooses e¤ort- which in‡uences his success according to
the true θ .
Success wiull also depend on his parents success- on the true
π high , π low .
But he doesn’t know π high , π low and θ .
Therefore, observing his success will reveal information about
π high , π low and θ .
µi ,t 1 ! experiences of i , t ! µi ,t

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The Piketty model of redistribution politics
The Model

After forming their new attitudes, µi ,t , individuals vote for the new
tax for next period.

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The Piketty model of redistribution politics
The Model

After forming their new attitudes, µi ,t , individuals vote for the new
tax for next period.
We assume that they are myopic,

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The Piketty model of redistribution politics
The Model

After forming their new attitudes, µi ,t , individuals vote for the new
tax for next period.
We assume that they are myopic,
By Black’s Theorem the tax will be the ideal tax of the median dynasty.

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The Piketty model of redistribution politics
Questions

Will beliefs converge?

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The Piketty model of redistribution politics
Questions

Will beliefs converge?

Will they converge to the truth.

Razin (LSE) EC319 11/10 19 / 25

The Piketty model of redistribution politics
Questions

Will beliefs converge?

Will they converge to the truth.
Are beliefs about redistribution path dependent?

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The Piketty model of redistribution politics
Analysis

E¤ort choice of i, t:

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The Piketty model of redistribution politics
Analysis

E¤ort choice of i, t:
Depends on the beliefs he starts with (inhereted from his parents)-
µi ,t 1

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The Piketty model of redistribution politics
Analysis

E¤ort choice of i, t:
Depends on the beliefs he starts with (inhereted from his parents)-
µi ,t 1
ei ,t (µi ,t 1) maximizes

e2
EU = Eµi ,t 1 [(1 t )(π̃ i ,t 1
+ θ̃e ) ] = (1 t )(Eµi ,t 1 [π̃ i ,t 1
] + Eµi ,t
2 1

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The Piketty model of redistribution politics
Analysis

E¤ort choice of i, t:
Depends on the beliefs he starts with (inhereted from his parents)-
µi ,t 1
ei ,t (µi ,t 1) maximizes

e2
EU = Eµi ,t 1 [(1 t )(π̃ i ,t 1
+ θ̃e ) ] = (1 t )(Eµi ,t 1 [π̃ i ,t 1
] + Eµi ,t
2 1

ei ,t (µi ,t 1) = (1 t )Eµi ,t 1 [θ̃ ]

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The Piketty model of redistribution politics
Analysis

After exerting e¤ort ei ,t (µi ,t 1 ), the individual draws an income

according to the probabilities mentioned above and given the true
values of π high , π low and θ .

Razin (LSE) EC319 11/10 21 / 25

The Piketty model of redistribution politics
Analysis

After exerting e¤ort ei ,t (µi ,t 1 ), the individual draws an income

according to the probabilities mentioned above and given the true
values of π high , π low and θ .
After observing his income he updates his belief about the parameters
π high , π low and θ .

Razin (LSE) EC319 11/10 21 / 25

The Piketty model of redistribution politics
Analysis

After exerting e¤ort ei ,t (µi ,t 1 ), the individual draws an income

according to the probabilities mentioned above and given the true
values of π high , π low and θ .
After observing his income he updates his belief about the parameters
π high , π low and θ .
Example: suppose the true parameters are that e¤ort is very
important and that social circumstances don’t matter much,

Razin (LSE) EC319 11/10 21 / 25

The Piketty model of redistribution politics
Analysis

After exerting e¤ort ei ,t (µi ,t 1 ), the individual draws an income

according to the probabilities mentioned above and given the true
values of π high , π low and θ .
After observing his income he updates his belief about the parameters
π high , π low and θ .
Example: suppose the true parameters are that e¤ort is very
important and that social circumstances don’t matter much,
i.e., θ is high and π high π low and both are small.

Razin (LSE) EC319 11/10 21 / 25

The Piketty model of redistribution politics
Analysis

After exerting e¤ort ei ,t (µi ,t 1 ), the individual draws an income

according to the probabilities mentioned above and given the true
values of π high , π low and θ .
After observing his income he updates his belief about the parameters
π high , π low and θ .
Example: suppose the true parameters are that e¤ort is very
important and that social circumstances don’t matter much,
i.e., θ is high and π high π low and both are small.
Suppose that the individual believes that θ is very low and that π high
and π low are high.

Razin (LSE) EC319 11/10 21 / 25

The Piketty model of redistribution politics
Analysis

After exerting e¤ort ei ,t (µi ,t 1 ), the individual draws an income

according to the probabilities mentioned above and given the true
values of π high , π low and θ .
After observing his income he updates his belief about the parameters
π high , π low and θ .
Example: suppose the true parameters are that e¤ort is very
important and that social circumstances don’t matter much,
i.e., θ is high and π high π low and both are small.
Suppose that the individual believes that θ is very low and that π high
and π low are high.
If he has chosen a high e¤ort and drew a high income- change beliefs
to higher θ .

Razin (LSE) EC319 11/10 21 / 25

The Piketty model of redistribution politics
Analysis

After exerting e¤ort ei ,t (µi ,t 1 ), the individual draws an income

according to the probabilities mentioned above and given the true
values of π high , π low and θ .
After observing his income he updates his belief about the parameters
π high , π low and θ .
Example: suppose the true parameters are that e¤ort is very
important and that social circumstances don’t matter much,
i.e., θ is high and π high π low and both are small.
Suppose that the individual believes that θ is very low and that π high
and π low are high.
If he has chosen a high e¤ort and drew a high income- change beliefs
to higher θ .
If he has chosen a low e¤ort and drew a high income- this is consistant
with his beliefs, no big change.

Razin (LSE) EC319 11/10 21 / 25

The Piketty model of redistribution politics
Results

Let S be the set of all beliefs, µ, which satisfy the following equaltions
for any element (π high , π high , θ ) in their support will be called
high
π + θ e (µ) = π high + θe (µ)
low
π + θ e (µ) = π low + θe (µ)

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The Piketty model of redistribution politics
Results

high
π + θ e (µ) = π high + θe (µ)
low
π + θ e (µ) = π low + θe (µ)

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The Piketty model of redistribution politics
Results

high
π + θ e (µ) = π high + θe (µ)
low
π + θ e (µ) = π low + θe (µ)

Example: suppose that π high = 0.5, π low = 0.2 and θ = 0.3.

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The Piketty model of redistribution politics
Results

high
π + θ e (µ) = π high + θe (µ)
low
π + θ e (µ) = π low + θe (µ)

Example: suppose that π high

= 0.5, π low = 0.2 and θ = 0.3.
Individual 1: Believs that θ = 0 ) e (µ) = 0 ) to satisfy the above
we need
π high = π high and π low = π low

Razin (LSE) EC319 11/10 23 / 25

The Piketty model of redistribution politics
Results

high
π + θ e (µ) = π high + θe (µ)
low
π + θ e (µ) = π low + θe (µ)

Example: suppose that π high

= 0.5, π low = 0.2 and θ = 0.3.
Individual 1: Believs that θ = 0 ) e (µ) = 0 ) to satisfy the above
we need
π high = π high and π low = π low

This is an individual who believes that its all about social

circumstances.

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The Piketty model of redistribution politics
Results

Individual 2: Believs that θ = 0.5 ) e (µ) = (1 t )0.5 ) to

satisfy the above we need

0.5 + 0.3(1 t )0.5 = π high + 0.5(1 t )0.5

low
0.2 + 0.3(1 t )0.5 = π + 0.5(1 t )0.5

implying,

Razin (LSE) EC319 11/10 24 / 25

The Piketty model of redistribution politics
Results

Individual 2: Believs that θ = 0.5 ) e (µ) = (1 t )0.5 ) to

satisfy the above we need

0.5 + 0.3(1 t )0.5 = π high + 0.5(1 t )0.5

low
0.2 + 0.3(1 t )0.5 = π + 0.5(1 t )0.5

implying,

π high = 0.5 0.2(1 t )0.5

low
π = 0.2 0.2(1 t )0.5

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The Piketty model of redistribution politics
Results

Individual 2: Believs that θ = 0.5 ) e (µ) = (1 t )0.5 ) to

satisfy the above we need

0.5 + 0.3(1 t )0.5 = π high + 0.5(1 t )0.5

low
0.2 + 0.3(1 t )0.5 = π + 0.5(1 t )0.5

implying,

π high = 0.5 0.2(1 t )0.5

low
π = 0.2 0.2(1 t )0.5

This individual is over optimistic about e¤ort and therefore puts less
belief in the importance of social circumstances.

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The Piketty model of redistribution politics
Results

Theorem
(i) All dynastic beliefs converge to beliefs in S. (ii) For any belief in S, one
can …nd initial beliefs that would converge to S. (iii) The tax rate
converges to the median ideal point of the converged dynasties.

Implications:

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The Piketty model of redistribution politics
Results

Theorem
(i) All dynastic beliefs converge to beliefs in S. (ii) For any belief in S, one
can …nd initial beliefs that would converge to S. (iii) The tax rate
converges to the median ideal point of the converged dynasties.

Implications:
Can still have persistant hetrogeneity of beliefs/attitudes towards
redistribution.

Razin (LSE) EC319 11/10 25 / 25

The Piketty model of redistribution politics
Results

Theorem
(i) All dynastic beliefs converge to beliefs in S. (ii) For any belief in S, one
can …nd initial beliefs that would converge to S. (iii) The tax rate
converges to the median ideal point of the converged dynasties.

Implications:
Can still have persistant hetrogeneity of beliefs/attitudes towards
redistribution.
Dynasties might have erroneous beliefs about the world.

Razin (LSE) EC319 11/10 25 / 25

The Piketty model of redistribution politics
Results

Theorem
(i) All dynastic beliefs converge to beliefs in S. (ii) For any belief in S, one
can …nd initial beliefs that would converge to S. (iii) The tax rate
converges to the median ideal point of the converged dynasties.

Implications:
Can still have persistant hetrogeneity of beliefs/attitudes towards
redistribution.
Dynasties might have erroneous beliefs about the world.
Can explain di¤erences between countires according to di¤erent paths
of beliefs and not di¤erent underlying parameters.

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