A Politico-Economic Theory of Income Redistribution

Abstract

This study integrates models of income redistribution developed by economists, who suggest that citizens voluntarily redistribute because of interdependent preferences and rely on the state for implementation owing to the public-good nature of redistribution, and political scientists, who focus on conditions that lead to demands that the state intervene to assist the poor and on the development of institutions that facilitate such demands. We propose a testable theory of redistribution and apply it to data from the American states. The empirical analysis addresses determinants of the Aid to Families with Dependent Children guarantee, adjusted for Medicaid and food stamps to which a family receiving the guarantee would be entitled. We posit significant links between the guarantee and both observable explanatory variables, such as per-capita income, and latent constructs, such as liberal party control. We specify observable indicators for the latent constructs and use the LISREL method to estimate parameters for the indicators and structural coefficients. The findings show that both political and economic variables significantly affect the level of the guarantee.