Political Economy of Director's Law: How Sincere Voters Decide on Cash and In-kind Redistribution in a Costly Political Framework

The amount of taxes and public expenditures seems to be uncorrelated to the level of market inequality in OECD countries. This empirical evidence is diffcult to be rationalized in a standard median voter theorem setting, where individuals rationally choose their preferred redistribution scheme. This paper reconciles theory and evidence by introducing a source of political asymmetry, that is income inequality: assuming that political activity is costly, income distribution can be a determinant of political asymmetry, provided that some classes of individuals are not able to satisfy their political budget constraint. The political framework consists of a bi-dimensional policy space where preferences over cash redistribution are monotonically decreasing with income, while those over in-kind redistribution depend on the middle class position, according to Director's law. The result is that the elected policy maker is increasingly biased toward rich classes of population as far as market income inequality increases.