RUHR. Imperfect Information and the Meltzer-Richard Hypothesis ECONOMIC PAPERS #213. Christian Bredemeier

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1 RUHR ECONOMIC PAPERS Christian Bredemeier Imperfect Information and the Meltzer-Richard Hypothesis #213

2 Imprint Ruhr Economic Papers Published by Ruhr-Universität Bochum (RUB), Department of Economics Universitätsstr. 150, Bochum, Germany Technische Universität Dortmund, Department of Economic and Social Sciences Vogelpothsweg 87, Dortmund, Germany Universität Duisburg-Essen, Department of Economics Universitätsstr. 12, Essen, Germany Rheinisch-Westfälisches Institut für Wirtschaftsforschung (RWI) Hohenzollernstr. 1-3, Essen, Germany Editors Prof. Dr. Thomas K. Bauer RUB, Department of Economics, Empirical Economics Phone: +49 (0) 234/ , Prof. Dr. Wolfgang Leininger Technische Universität Dortmund, Department of Economic and Social Sciences Economics Microeconomics Phone: +49 (0) 231/ , Prof. Dr. Volker Clausen University of Duisburg-Essen, Department of Economics International Economics Phone: +49 (0) 201/ , Prof. Dr. Christoph M. Schmidt RWI, Phone: +49 (0) 201/ , Editorial Offi ce Joachim Schmidt RWI, Phone: +49 (0) 201/ , Ruhr Economic Papers #213 Responsible Editor: Wolfgang Leininger All rights reserved. Bochum, Dortmund, Duisburg, Essen, Germany, 2010 ISSN (online) ISBN The working papers published in the Series constitute work in progress circulated to stimulate discussion and critical comments. Views expressed represent exclusively the authors own opinions and do not necessarily reflect those of the editors.

3 Ruhr Economic Papers #213 Christian Bredemeier Imperfect Information and the Meltzer-Richard Hypothesis

4 Bibliografische Informationen der Deutschen Nationalbibliothek Die Deutsche Bibliothek verzeichnet diese Publikation in der deutschen Nationalbibliografie; detaillierte bibliografische Daten sind im Internet über: abrufbar. ISSN (online) ISBN

5 Christian Bredemeier 1 Imperfect Information and the Meltzer- Richard Hypothesis Abstract Despite a strong theoretical prediction that income skewness and redistribution should be positively linked, empirical evidence on this issue is mixed. This paper argues that it is important to distinguish between sources of changes in income skewness. Two sources of such changes are discussed: rising polarization and upward mobility, which both increase income skewness. Under imperfect information, these developments affect redistribution in different ways. While rising polarization increases redistribution, upward mobility can have the opposite effect. Reasonable degrees of informational imperfection are sufficient to generate increasing income skewness and decreasing redistribution in the presence of upward mobility. JEL Classification: D72, H24, D83 Keywords: Voting; redistribution; imperfect information October Ruhr Graduate School in Economics and TU Dortmund. I would like to thank Falko Jüßen, Wolfgang Leininger, Ludger Linnemann, and Andreas Schabert for helpful comments and suggestions. The paper has bene tted from seminar participants at the University of Bochum and conference participants at the 2010 Annual Congress of the European Economic Association, the 2010 Annual Congress of Verein für Socialpolitik, the 2010 Spring Meeting of Young Economists, the 2010 Annual Conference of the Scottish Economic Society, and the 2010 Doctoral Conference of the Ruhr Graduate School in Economics. All correspondence to Christian Bredemeier, University of Dortmund, Department of Economics, Macroeconomics, Dortmund, Germany, christian.bredemeier@tu-dortmund.de.

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8 5 x 10-5 (a) log-normal distribution $15,000 $30,000 $45,000 $60,000 5 x 10-5 (b) after rise in polarization $15,000 $30,000 $45,000 $60,000 5 x 10-5 (c) after upward mobility $15,000 $30,000 $45,000 $60,000

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13 s L s M s H 0 a 1 αa1 a s L s M s H 0 a 1 αa1 a

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16 s L s M s H 0 a 1 αa1 a s L s M s H 0 κa 2 1 καa 2 1 y

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