Redistributive Politics And Market Efficiency: An Experimental Study
Source: Institute for the Study of Labor
The authors study the interaction between competitive markets that produce large but unequally distributed welfare gains and elections through which the poor majority can redistribute income away from the rich minority. In their simple laboratory democracy, subjects first earn their income by trading in a double auction market and thereafter vote on redistributive policies in two-candidate elections. In addition, in one of the treatments subjects can attempt to influence the candidates' policy choices by transferring money to them. They observe very high levels of redistribution - even when transfers to candidates are possible - with little effect on market efficiency. Overall, the experimental results are explained by their equilibrium predictions.