Sapienza Ricerca

Income (and wealth) inequality and public policies are linked by a two-way relationship. Public policies typically have redistributive features, but, at the same time, income inequality affects the design of redistributive policies. The focus of this research is on the link going from income distribution to public policies. To address this issue, we follow a political economy approach, which recognises individuals'heterogeneity and gives a prominent role to the political process through which voters'heterogeneous preferences are aggregated. We depart from the standard median voter framework and describe the political process using a probabilistic voting model with a multidimensional policy space. Due to this multidimensionality, when voting citizens must compare gains from different policies to determine the salient issue and then vote accordingly. In equilibrium, intense minorities may exercise a strong political influence on the issue they care about. We use this methodology to analyse the allocation of public spending between basic vs higher education and the choice of alternative means of social protection (social expenditure vs market regulation). Throughout we stress the role of income inequality in determining voters'salient issue and in shaping the equilibrium outcome.