Inequality, ethnic diversity, and redistribution

Seminal political economy models from Meltzer and Richard, among others, theorize that, in democracies, more inequality should lead to more redistribution. Most country-level empirical studies find weak support for this prediction. This paper makes two contributions to this debate. First, I identify some of the key shortcomings of previous tests and provide a new empirical analysis that corrects for these limitations. Using a dataset covering 89 developed and developing democracies, I find that inequality is associated with more redistribution. Second, I show that inequality’s effect on redistribution is weaker in democracies in which the poor – defined as the people with income below the median – are divided along ethnic lines than in those in which they are ethnically unified. Taken together, these results suggest that although economic inequality increases redistribution, the magnitude of the relationship is conditional on how inequality interacts with other social cleavages, such as ethnicity.