Redistribution by the Rich: Information, Perceptions, and Preference

Abstract

This dissertation puts forward a novel theory of imperfect economic information to understand the determinants of high income earners' support for tax and transfer policies. Although the notion that voters are poorly informed is now a central element of the scholarly heritage of political science, the implications of economic illiteracy of individuals is seldom a consideration in the models of redistributive preferences. Most accounts assume, incorrectly, that people use factual information about income inequality and their position in the income distribution in determining expected benefits and losses from prospective taxation. This project challenges the common perfect information assumption. I thus investigate the micro-mechanisms through which high-income individuals make decisions about welfare policies in the absence of perfect information. I argue that individuals use social comparison and cognitive heuristics when they lack precise knowledge of the extent of economic inequality and their position on the income ladder. These generated perceptions, in return, form the basis of their calculation of potential benefits and losses due to tax policies. I make several contributions. First, I develop a theoretical model and show empirically that individuals perceiving a significant income gap between themselves and high-income earners are more likely to support higher tax rates. Second, through analyzing survey data, I find ample evidence suggesting that the amount and substance of information available to individuals may be more important than the actual data in predicting and shaping political behavior. Remarkably, my results evince that individuals tend to judge the level of inequality proportionally to the degree of inequality they perceive. I further demonstrate that the effect of misperceptions on one's willingness to contribute to the welfare system depends on the political institutions that control the amount and scope of information available to their citizens. Finally, my analysis of the preferences of Ottoman elites reveals an example for this phenomenon. I find that in authoritarian settings in which class differences are very institutionalized, there are no informational asymmetries. In such cases, decisions of the elite are not affected by distributional misperceptions, and they are predominantly governed by material self interest considerations.