Inequality and Political Consensus

This paper develops a model of political consensus in order to explain the missing link between inequality and political redistribution. Political consensu s is an implicit agreement not to vote for extreme policy proposals. We show tha t such an agreement may play an efficiency-enhancing role. Voters anticipate that voting for extremist parties increases policy uncertainty in the future. A pol itical consensus among voters reduces policy uncertainty because power-seeking p oliticians propose non-discriminatory policies in their own interest. We study h ow much inequality can be sustained in a democracy and how the limits to redistr ibution vary with initial inequality. We find that more inequality need not lead to more redistribution. The maximum amount of redistribution decreases with ine quality if (and only if) agents are sufficiently patient. In this case inequalit y is politically self-sustaining.