THREE ESSAYS IN POLITICAL ECONOMY

Abstract

This dissertation explores three different relevant questions in political economy. Chapter 1 is devoted to understanding why populist-outsider candidates get elected, and what conditions may favor/hinder their electability. The results show that countries with a higher income and wealth concentration are more likely to elect populist outsiders than countries where income and wealth are more equally distributed. It is also shown that elections with a runoff also are less likely to bring these populist outsiders into office. Chapter 2 in turn explores the role of the middle class in moderating political outcome in a framework where money and votes play two distinctive roles in the election process. In this chapter, a three-class model of heterogeneous agents is developed in which groups affect policy outcomes through their voting behavior and contributions to political campaigns, and where income inequality can lead to extreme policy outcomes. Increasing the size of the middle class reduces the likelihood of extreme policy outcomes, as does a richer middle class. This result highlights the importance of a large and strong middle class for political stability. Finally Chapter 3 looks at the question of why inequality has remained persistently high in Chile despite its success in reducing poverty and achieving high growth for two decades while having a mostly pro-poor structure of public expenditures. We show that the key factors explaining this persistent inequality have been a low level of fiscal expenditures caused by low tax revenues that have not permitted enough public investment in human capital and R&D.