Income inequality, redistribution, and poverty: Contrasting rational choice and behavioral perspectives

Abstract

Based on the standard axiom of individual utility maximization, rational choice has postulated that higher income inequality translates into greater redistribution by shaping the median voter's preferences. While numerous papers have tested this proposition, the literature has remained divided over the appropriate measure for redistribution. Revisiting the original contribution by Meltzer and Richard in 1981, the present paper argues that the median voter hypothesis implies that relative redistribution should increase in line with inequality. However, an empirical test based on 110 observations from the Luxembourg Income Study (LIS) finds no support for the hypothesis. By contrast, voters' actual preferences offer a better guide to understanding redistributive outcomes. The findings challenge the narrow concept of human motivation that underpins rational choice, and point to the importance of fairness orientations that have been emphasized in behavioral economics. © 2014 International Labour Organization (ILO). Review of Income and Wealth published by John Wiley & Sons Ltd on behalf of International Association for Research in Income and Wealth.