Income Inequality & Redistributional Spending: An Empirical Investigation of Competing Theories (Report‪)‬

1. INTRODUCTION Over the last three decades, a large amount of literature has been devoted to explaining the relationship between redistribution and (income) inequality. Diverse theoretical mechanisms relating redistribution to inequality have been proposed. The theoretical results are often de rived from median voter models in the vein of Meltzer and Richard (1981), Romer (1975) and Roberts (1977) or one of their extensions. The general conclusion is that redistribution increases with a rising income gap between the median and the mean voter, and so does redistributive government taxation. However, not all models predict that redistribution runs from rich to poor as predicted by the median voter approach. By contrast, focusing on the insurance motives of public transfer spending, Moene and Wallerstein (2001, 2003) predict a negative relation between income inequality and government transfers, implying that redistribution runs from poor to rich. Furthermore, according to the relations derived by other models, redistribution runs from the ends of the income distribution towards the middle class (Stigler, 1970; Dixit and Londregan, 1998; Epple and Romano, 1996).