Inequality, Institutions and Redistribution

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.