* CONTENTS

1. Introduction 2. Literature review: On the relationship between income inequality and the size of the welfare state 3. The model 4. Empirical assessment of the implications of the various models 5. Conclusion

* SUMMARY

Many have long believed that inequality in democracy would pressure society into more redistribution. Alesina and Rodrik (1994), Meltzer and Richard (1981), Persson and Tabellini (1994), for instance, model a positive relationship between income inequality and redistributive tax rates. OECD’ Society at a Glance 2011, on the other hand, reports that countries with a more equal income distribution, measured by the Gini coefficient, tended to have higher social spending (pp. 74-75; EQ 5.2). Why do we have such a mismatch between theory and empirical findings? In this report, we study the relationship between inequality and redistribution among OECD countries using a political economy approach, and argue that the relationship between inequality and redistribution in democratic society is non-monotonic. In particular, we show that the relationship is contingent upon...