Policy Uncertainty, Electoral Securities and Redistribution
Caltech Social Science Working Paper No. 1229
44 Pages Posted: 18 Jul 2005 Last revised: 29 Jul 2008
Date Written: March 27, 2008
Abstract
This paper investigates how uncertainty about the adoption of a redistribution policy affects political support for redistribution when individuals can trade policy contingent securities in the stock market. We show that the demand for redistribution is always smaller than in the case where no policy-insurance market is available. Consistent with the empirical evidence, our analysis implies that in economies with well-developed financial markets the level of redistribution decreases with the level of participation in these markets and with income inequality. We show that the existence of a policy insurance market may increase future expected inequality even if a majority of individuals are redistributing resources through private transfers.
Keywords: Policy uncertainty, financial markets, redistribution
JEL Classification: D72, G10, D31
Suggested Citation: Suggested Citation
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