Motivated prospects of upward mobility
Alasalmi, Juho (2018)
2018
MDP in Public Economics and Public Finance (MGE)
Johtamiskorkeakoulu - Faculty of Management
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Hyväksymispäivämäärä
2018-06-08
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:uta-201807022210
https://urn.fi/URN:NBN:fi:uta-201807022210
Tiivistelmä
The prospect of upward mobility (POUM) hypothesis conjectures that the reason why the poor do not expropriate the rich and sometimes seem to vote against their self-interest is that they expect to move upward in the income ladder and fear that the higher redistribution may negatively affect them in the future. This thesis explicitly models the beliefs agents have about their future income and studies how and when these beliefs can be overly optimistic resulting in low redistribution.
The model of motivated prospects of upward mobility is built on a model proposed by Minozzi (2013) and differs from it in that this work adopts a cognitive technology of belief distortion from Bénabou and Tirole (2002). In the model, agents collectively choose a linear tax rate under uncertainty about their exogenous future incomes. In addition to the utility from consumption, agents derive utility from the anticipation of their future consumption. This incentivizes them to distort their beliefs. Given the technology for belief distortion, the motivated prospects of upward mobility emerge endogenously as a result of agents' choices between anticipation and consumption.
When belief formation and voting are strategic, the poor will form overly optimistic beliefs and vote for low taxes if the value of anticipation is high enough and if their optimism does not cause too drastic a change in tax policy. If belief formation and voting are non-strategic, the poor will always indulge in optimism and may even vote against their own best interest. A striking result is that if the incomes of the rich increase as the transfers to the poor stagnate, the poor may demand less redistribution. That is, contrary to the classic benchmark model of Meltzer and Richard (1981), an increase in inequality does not necessarily lead to an increase in demand for redistribution. It is also shown, how Minozzi's (2013) model is a special case of fully naive inference and that Minozzi's results are not robust to Bayesian rational agents.
Lastly, a dichotomy between naive and sophisticated cognitive technologies for endogenous belief distortion in the literature of psychological economics is identified, and a general model of motivated beliefs which brings these various cognitive technologies together and shows how they relate is proposed.
The model of motivated prospects of upward mobility is built on a model proposed by Minozzi (2013) and differs from it in that this work adopts a cognitive technology of belief distortion from Bénabou and Tirole (2002). In the model, agents collectively choose a linear tax rate under uncertainty about their exogenous future incomes. In addition to the utility from consumption, agents derive utility from the anticipation of their future consumption. This incentivizes them to distort their beliefs. Given the technology for belief distortion, the motivated prospects of upward mobility emerge endogenously as a result of agents' choices between anticipation and consumption.
When belief formation and voting are strategic, the poor will form overly optimistic beliefs and vote for low taxes if the value of anticipation is high enough and if their optimism does not cause too drastic a change in tax policy. If belief formation and voting are non-strategic, the poor will always indulge in optimism and may even vote against their own best interest. A striking result is that if the incomes of the rich increase as the transfers to the poor stagnate, the poor may demand less redistribution. That is, contrary to the classic benchmark model of Meltzer and Richard (1981), an increase in inequality does not necessarily lead to an increase in demand for redistribution. It is also shown, how Minozzi's (2013) model is a special case of fully naive inference and that Minozzi's results are not robust to Bayesian rational agents.
Lastly, a dichotomy between naive and sophisticated cognitive technologies for endogenous belief distortion in the literature of psychological economics is identified, and a general model of motivated beliefs which brings these various cognitive technologies together and shows how they relate is proposed.