Inequality Aversion, Populism, and the Backlash Against Globalization — by Lubos Pastor, Pietro Veronesi

Inequality Aversion, Populism, and the Backlash Against Globalization — by Lubos Pastor, Pietro Veronesi

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Inequality Aversion, Populism, and the Backlash Against Globalization

NBER Working Paper No. 24900
Issued in August 2018
NBER Program(s):Asset Pricing, International Finance and Macroeconomics, International Trade and Investment, Political Economy

Motivated by the recent rise of populism in western democracies, we develop a model in which a populist backlash emerges endogenously in a growing economy. In the model, voters dislike inequality, especially the high consumption of the “elites.” Economic growth exacerbates inequality due to heterogeneity in risk aversion. In response to rising inequality, rich-country voters optimally elect a populist promising to end globalization. Redistribution is of limited value in containing the backlash against globalization. Countries with more inequality, higher financial development, and current account deficits are more vulnerable to populism, both in the model and in the data. Evidence on who voted for Brexit and Trump in 2016 also largely supports the model.

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Document Object Identifier (DOI): 10.3386/w24900

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