Fairness and Redistribution

TLDR

Beliefs about fairness and income determinants shape redistributive policy, while tax policies determine equilibrium income composition. The study demonstrates that interactions between social beliefs and welfare policies can generate multiple equilibria or steady states. The model assumes societies that view effort as the main income source adopt low redistribution and taxes, whereas those attributing wealth to luck or connections impose high taxes, distorting allocations. Equilibria with effort-based beliefs yield high effort, limited luck, and fair outcomes, while belief-based equilibria explain cross‑country differences in inequality perceptions and redistribution choices.

Abstract

Different beliefs about the fairness of social competition and what determines income inequality influence the redistributive policy chosen in a society. But the composition of income in equilibrium depends on tax policies. We show how the interaction between social beliefs and welfare policies may lead to multiple equilibria or multiple steady states. If a society believes that individual effort determines income, and that all have a right to enjoy the fruits of their effort, it will choose low redistribution and low taxes. In equilibrium, effort will be high and the role of luck will be limited, in which case market outcomes will be relatively fair and social beliefs will be self-fulfilled. If, instead, a society believes that luck, birth, connections, and/or corruption determine wealth, it will levy high taxes, thus distorting allocations and making these beliefs self-sustained as well. These insights may help explain the cross-country variation in perceptions about income inequality and choices of redistributive policies.