This dissertation explores the role of efficiency of redistributive institutions (ERI) on redistribution. The first substantive essay proposes a theoretical model to explain the lack of strong empirical evidence in favor of a positive relationship between income inequality and redistribution. This chapter first shows that even exogenously given ERI affects the relationship between income inequality and redistribution. Then, it introduces three specifications to endogenize ERI. In these various specifications, increasing inequality reduces the ERI when (1) ERI is an increasing function of average income or (2) political influence on ERI is positively associated with income or (3) the median voter has some prospect of upward mobility. There is one common element in these various specifications. While income inequality increases the pressure for redistribution it also increases the incentive to reduce the efficiency of redistribution in order to constrain aggregate redistribution. Hence, the main conclusion is that one needs consider these conflicting effects in order to account for the puzzling lack of strong empirical evidence for a positive relationship between income inequality and redistribution.

The second substantive essay empirically analyzes the role of efficiency of redistributive institutions on redistribution in the form of social security and welfare spending. When measures of ERI are incorporated into the existing empirical specifications of income inequality and redistribution, cross-sectional and panel data regressions show that the ERI significantly increases redistribution. However, we find weaker evidence for the role of income inequality on redistribution. Income inequality does not appear to be strongly significant in various specifications of the redistribution equation. Based on this evidence, this chapter concludes that ERI plays an important role in redistribution but this effect does not resolve the fiscal policy puzzle that is emphasized in the theoretical chapter. Moreover, this chapter also explores the determinants of ERI. Our empirical results confirm the theoretical model that an increase in GDP per capita and democracy increases ERI. However, there is less convincing evidence for the negative role of income inequality on the ERI. Among the other determinants of ERI, freedom of the press and trade openness improve ERI considerably.