Policy Uncertainty, Electoral Securities and Redistribution

Abstract

This paper investigates how uncertainty about the adoption of a redistribution policy affects political support for redistribution when individuals can trade policy contingent securities in the stock market. We show that the demand for redistribution is always smaller than in the case where no "policy-insurance market" is available. Consistent with the empirical evidence, our analysis implies that in economies with well-developed financial markets the level of redistribution decreases with the level of participation in these markets and with income inequality. We show that the existence of a policy insurance market may increase future expected inequality even if a majority of individuals are redistributing resources through private transfers.

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