Unequal societies: Income distribution and the social contract

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Abstract

This paper develops a theory of inequality and the social contract aiming to explain how countries with similar economic and political "fundamentals" can sustain such different systems of social insurance, fiscal redistribution, and education finance as those, of the United States and Western Europe. With imperfect credit and insurance markets some redistributive policies can improve ex ante welfare, and this implies that their political support tends to decrease with inequality. Conversely, with credit constraints, lower redistribution translates into more persistent inequality; hence the potential for multiple steady states, with mutually reinforcing high inequality and low redistribution, or vice versa.

Original languageEnglish (US)
Pages (from-to)96-129
Number of pages34
JournalAmerican Economic Review
Volume90
Issue number1
DOIs
StatePublished - Mar 2000
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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