The Momentous Influence of Expectations: Income and Redistribution

• In Event: Economic Change and the Welfare State

Abstract

Influential theories in political economy posit that risk and insurance motivations affect an individual's demand for redistribution. In essence, this literature looks at expectations of future income in various, often compound, ways. We argue that what is largely overlooked is the influence of higher moments in future income expectations such as uncertainty and optimism. We make two points: We show theoretically that (i) different moments of expectations about future income have different implications for individuals' demand for redistribution and (ii) the effect of higher moments only obtains in progressive tax systems. We argue that in such systems, an increase in uncertainty about future income increases the demand for redistribution. We test the implications of our theory through a combination of observational evidence and laboratory experiments. Our results have important implications for how we understand individual preference formation with respect to risk, progressivity and future expected income.

Authors

• Mats Ahrenshop, University of Oxford

• Ryan Rholes

• David Rueda, University of Oxford