Income Inequality, Redistribution, and Poverty: Contrasting Rational Choice and Behavioral Perspectives


  • Note: A first draft of this paper was presented at the UNU-WIDER Conference on “Poverty and Behavioural Economics” in Helsinki (September 1–2, 2011). The author is grateful for helpful comments received from participants and the conference organizers. Christina Behrendt, Michaëlle de Cock, Sangheon Lee, and Kristen Sobeck (all of the ILO) and two unnamed peer reviewers provided valuable feedback at different stages of the drafting process. Particular credit is due to Merita Jokela for her help in extracting data from the Luxembourg Income Study. All errors are those of the author; the views and interpretations in this paper are those of the author and do not necessarily reflect those of the ILO.


Based on the standard axiom of individual utility maximization, rational choice has postulated that higher income inequality translates into greater redistribution by shaping the median voter's preferences. While numerous papers have tested this proposition, the literature has remained divided over the appropriate measure for redistribution. Revisiting the original contribution by Meltzer and Richard in 1981, the present paper argues that the median voter hypothesis implies that relative redistribution should increase in line with inequality. However, an empirical test based on 110 observations from the Luxembourg Income Study (LIS) finds no support for the hypothesis. By contrast, voters' actual preferences offer a better guide to understanding redistributive outcomes. The findings challenge the narrow concept of human motivation that underpins rational choice, and point to the importance of fairness orientations that have been emphasized in behavioral economics.