Income and political dynamics

The notion that the evolution in the income distribution has a first order impact on political dynamics seems intuitively appealing. CEP member John Morrow and coauthor Michael Carter incorporate this in a model in which forward looking agents inform their electoral choice on the basis or their prospects of upward mobility.

They first develop a model in which agents have perfect information about the evolution of income and determine the appeal to voters of redistributive politics in such an environment, and find that this gets stronger when the agent with mean income has prospects of downward mobility and vice versa. When confronting this prediction with actual developments in Chile and Peru, they find that this model overstates the demand for redistribution compared to the electoral outcomes in the two countries from the mid-nineties onwards.

Thus they consider a model in which voters undergo a process of learning about the income dynamics in the economy in a Bayesian fashion. Assuming that the process of learning started with optimistic priors about the prospect of upward mobility, they can match more accurately the initial electoral success of laissez-faire policies followed by a swing to the left of the political spectrum.

For further reading please see Left, Right, Left: Income and Political Dynamics in Transition Economies (John Morrow and Michael Carter), CEP Discussion Paper No 1111, January 2012