Inequality Aversion, Populism, and the Backlash against Globalization

Abstract

Motivated by the recent rise of populism in Western democracies, we develop a tractable equilibrium model in which a populist backlash emerges endogenously in a strong economy. In the model, voters dislike inequality, especially the high consumption of “elites.” Economic growth exacerbates inequality due to heterogeneity in preferences, which leads to heterogeneity in returns on capital. In response to rising inequality, voters optimally elect a populist promising to end globalization. Equality is a luxury good. Countries with more inequality, higher financial development, and trade deficits are more vulnerable to populism, both in the model and in the data.