INEQUALITY, INSTITUTIONS AND REDISTRIBUTION
INEQUALITY, INSTITUTIONS AND REDISTRIBUTION
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Date
2005-07-29
Authors
Aysan, Ahmet Faruk
Advisor
Betancourt, Roger
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Abstract
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.