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Income Inequality and Redistributive Government Spending

OECD

Erwin R. Tiongson

World Bank

This article examines empirically the question of whether more unequal societies spend more on income redistribution than their more egalitarian counterparts. Theoretical arguments on this issue are inconclusive. The political economy literature suggests that redistributive spending should be higher in more unequal societies due to median voter preferences. Alternatively, it can be argued that unequal societies may spend less, not more, on redistribution because of capital market imperfections. Based on different data sources, the cross-country evidence reported in the article supports the "imperfect markets" hypothesis, showing that more unequal societies do spend less on redistribution. The empirical analysis also takes into account the fact that the share of redistributive transfers in GDP is nonnegative.

Key Words: inequality • redistribution • imperfect markets • Tobit estimation

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