A Political Economy Model of Earnings Mobility and Redistribution Policy

This paper presents a politico‐economic model that includes a mutual link between life cycle earnings mobility and redistributive politics. The model demonstrates that when an economy features a high opportunity of upward mobility and high risk of downward mobility, it attains a unique equilibrium where unskilled, low‐income agents support a low redistribution because of the hope of upward mobility in future. In contrast, the economy attains multiple equilibria when mobility opportunity and risk are low: one is an unskilled‐majority equilibrium defined by low mobility and the other is a skilled‐majority equilibrium defined by high mobility. The paper gives a comparison between the political equilibrium and the social planner's allocation in terms of mobility, and shows that the skilled‐majority equilibrium realizes mobility close to the optimal one.