A model of redistribution under social identification in heterogeneous federations

Journal of Public Economics 143 (2016) 39–48

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A model of redistribution under social identification in heterogeneous federations Joshua Holm Applied Economics, Vrije Universiteit Brussel, Pleinlaan 2 Brussels 1050, Belgium

A R T I C L E

I N F O

Article history: Received 4 August 2014 Received in revised form 9 May 2016 Accepted 11 August 2016 Available online 15 August 2016 JEL classification: H77 H20 J15 Keywords: Identity Redistribution Fiscal federalism

A B S T R A C T Redistribution of resources to accommodate income heterogeneity within a federation is often fiercely debated (e.g., Belgium, Germany or the European Union). To help elucidate potential drivers behind such debates, this article builds on social identity theory to develop a theoretical framework linking jurisdictional identification and preferences towards intra-federation redistributive financial flows. We show that federal, rather than local, identification can lead individuals to shift their redistribution preferences against their narrowly-defined personal economic interest. In contrast to predictions of standard models, the sign and strength of this effect depends crucially not only upon individuals’ characteristics, but also upon the social groups (i.e. regions) to which they belong. We furthermore illustrate that federal, rather than regional, identification should be more widespread in poorer and/or more populous regions within a federation, but less common in regions which are very homogeneous internally or very dissimilar from the rest of the federation. © 2016 Elsevier B.V. All rights reserved.

1. Introduction Recent evidence indicating an upward trend in income heterogeneity within developed countries (Piketty and Saez, 2003; Piketty, 2014) has reinstated the redistribution of income and wealth at the top of the political and social agenda. Yet, even though larger differences between ‘haves’ and ‘have-nots’ can have obvious fairness implications (Gottschalk and Smeeding, 1997), redistribution remains a fiercely contested debate between proponents and opponents. This naturally raises crucial questions regarding the origins and legitimacy of – as well as determinants of support for – income redistribution, and the welfare state more generally. In economics, the classic study of Meltzer and Richard (1981) is often credited as the starting point of such investigations, which have brought forward an extensive list of determinants of redistributive preferences, including income, preference heterogeneity, uncertainty, patriotism and even genetic factors (e.g. Qari et al., 2012; Bellani and Scervini, 2015). This article focuses on the role of individuals’ social identification. Based on insights from social identity theory (e.g. Tajfel and Turner, 1985), recent scholarship has argued that individuals are likely to

E-mail address: [email protected] (J. Holm).

http://dx.doi.org/10.1016/j.jpubeco.2016.08.005 0047-2727/© 2016 Elsevier B.V. All rights reserved.

be more altruistic towards those with whom they share a common ‘identity’ (Alesina et al., 1999; Ashworth et al., 2002; Freier et al., 2016 for a review, see Costa Font and Cowell, 2015). Our main contribution lies in introducing this identification-redistribution relation into a setting of multilevel governance in order to assess how individuals’ identification with a broad national or federal jurisdiction, rather than a more local or regional jurisdiction, affects their preferences towards intra-federation redistribution of resources. This question is important for a number of reasons. First, it helps elucidate the linkage often presumed to exist between national identity and support for welfare state policies. Researchers as well as policymakers have indeed posited that national identification – and the formation of a national identity – can foster support for the welfare state because it might act as a “societal glue” (Marshall, 1950; Miller, 1995; Johnston et al., 2010). While this appears intuitive, empirical evidence is ambiguous at best, and frequently contradictory (Wright and Reeskens, 2013). Our model contributes to the clarification of this empirical puzzle by suggesting that i) a fuller definition of national identification taking into account possible alternatives to federal identification is required to make accurate inferences, and ii) the sign of the national identity/welfare support linkage may depend crucially on the roles individuals and their social groups play as net donors or recipients in federal-level redistributive programs.

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J. Holm / Journal of Public Economics 143 (2016) 39–48

Second, introducing the identification-redistribution relation into a federal setting provides important new insights for the literature on the costs and benefits of multilevel governance structures (Seabright, 1996; Myerson, 2006; Hatfield and Padro-i-Miquel, 2012; Beramendi, 2012; Geys and Vermeir, 2014; Balcells et al., 2015). The importance of individuals’ jurisdictional identification for their redistributive preferences is key to a proper understanding of frequently recurring debates on redistributive financial flows across regions within federations1 as well as on the fiscal deepening of, and recent bailout necessities within, the European Union (Bechtel et al., 2014; Daniele and Geys, 2015). In the following section, we propose a model of redistributive taxation in which individuals identify, to varying degrees, with the nested geographical entities to which they belong. For reasons of tractability, we reduce these tiers of possible identification to two, termed federal and regional. Hence, the two identifiable groups facing each individual are i) a comparatively local geographical or political region in which she resides (e.g., eastern Germany/western Germany, Flanders/Wallonia, or US states), and ii) a larger federation encompassing that region along with one or more others (e.g., Germany, Belgium, or the US). As in Shayo (2009) and Lindqvist and Östling (2013), individuals’ utility functions are assumed to include two characteristics of their identified group: i) its status within society (which reflects a group’s standing along dimensions of importance to individuals such as consumption) and ii) her own similarity to the group’s other members (which is captured by the distance in conceptual space between the individual and the average of her identified group along a vector of relevant attributes, such as ethnicity or religion). The key results from the model can be summarized as follows. First, we find that ‘jurisdictional’ identification may shift individuals’ preferences for redistribution against their narrow personal economic interests: some wealthy individuals will be more supportive of redistribution under broad federal social identities, and some poor individuals will be less supportive. The intuition is that any inherent economic incentive poor people in a poor region feel to appropriate to their own benefit (and that of others in their region) becomes blunted by their in-group’s inclusion of residents of other regions, who by construction are wealthier on average. Similarly, federal identification among rich people in a rich region implies an in-group with a lower average income, thereby weakly increasing the rate at which they are willing to sacrifice their own material payoff to the benefit of others. Second, the signs and strengths of these effects are related to various characteristics of the regions, and of the individuals themselves. For instance, federal identification’s effects on redistributive preferences are predicted to be stronger in less populous regions, all else equal. This arises because shifting from regional to federal identification moves more outsiders into the in-group of someone in a smaller region, thus creating a more substantial ‘dilution’ effect. Additionally, and more in line with traditional models of redistributive public policies (Meltzer and Richard, 1981; Moene and Wallerstein, 2001), the model predicts that support for redistribution is decreasing in the level of personal income, and sometimes in the aggregate level of income for one’s own region. Finally, we show that federal, rather than regional, identification will likely be more widespread in poorer and/or more populous regions, but less common in regions which are internally homogeneous or whose inhabitants are dissimilar to people elsewhere in the federation in terms of relevant socio-economic traits.

1 One can think of the near-continuous debates on inter-regional financial flows in Belgium (Flanders vs. Wallonia), Germany (East vs. West), or Italy (North vs. South) as examples.

2. The model 2.1. General framework Consider a federation F within which are nested at least two regions. Each of N inhabitants of the federation resides in exactly one of the regions, such that NJ individuals reside in region J, with SJ NJ = N . Each of the N individuals, indexed by i, is endowed with a nonnegative, exogenously determined pre-tax income yi . The distribution of income across regions and individuals will be elaborated below. There are two central components to the model: redistribution and social identification. 2.1.1. Redistribution Given an as-yet undefined heterogeneity in incomes across both individuals and regions, there exists redistribution among all inhabitants of the federation. Each individual’s income yi is taxed at a rate t, and the resulting tax revenues are returned in equal lump-sum transfers to each of the N individuals. This redistributive mechanism is not frictionless. Following Bolton and Roland (1996) and Beramendi (2012), among many others, tax revenues collected are subject to a quadratic cost of taxation equal to (t2 /2) per unit. This is intended to capture redistributive inefficiency, reflecting for instance tax collection or compliance costs and the excess burden of taxation. Hence, net of taxes and redistributive transfers, individual i s disposable income is   pi (t) = (1 − t)yi + t − t2 /2 y¯ ,

(1)

with y¯ denoting the mean income endowment across all N individuals. The tax rate t is determined via a democratic voting process among all N inhabitants of the federation. Each individual sincerely votes her most preferred tax rate ti , which, as will be clarified below, depends on her income level and social identification. A voting mechanism selects the winning tax rate, which is subsequently enacted throughout the federation as the prevailing rate t. No specific political mechanism need be imposed in order to derive testable predictions regarding individual preferences. When identifying the equilibrium tax rate, however, we follow a simple median voter framework in which the median of all rates voted is selected as t. This framework – developed by Black (1948), among others – has the intuitively appealing property that the resulting tax rate t can beat any other rate in a pairwise competition under simple majority rule. 2.1.2. Social identification The second key component of the model concerns individuals’ social identification. This is modeled by assuming that an individual’s utility not only depends on her net income pi (t), but is also affected by her being a member of some social group(s) (Tajfel and Turner, 1985; Akerlof and Kranton, 2000; Klor and Shayo, 2010). In our setting, we more specifically assume that each individual i identifies, in some combination, with either or both of two social groups to which she belongs: her comparatively local region Li or the entire federation F. Let miL and miF , respectively, capture the strength or salience of each of these group identifications. Further, let gi denote the profile of individual i s two social group identifications, such that gi = (miL , miF ). To establish the generality of the model s main predictions, no restrictions on the domains or correlation of these group identifications are imposed here, although we will return to this below. Social identification impacts an individual’s utility in two ways (Shayo, 2009; Lindqvist and Östling, 2013). On the one hand, there is a utility loss from the difference (or distance) – diG − to other members of an identified group G ∈ {Li , F}. Akerlof (1997, 1008) refers to this as the ‘conformist model’ since it implies that any “individual wants to minimize the social distance between herself and others.” This also captures the idea that people have a tendency

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to prefer sorting into homogeneous peer groups (the homophily principle: Blau, 1977; McPherson and Smith-Lovin, 1987), which reflects a disutility incurred from some forms of trait heterogeneity.2 Following Shayo (2009), distance may be operationalized as:  diG =

H 

h

w



qhi

−

q¯ hG

2

1/2 ,

(2)

h=1

a Euclidean distance in trait space (with one dimension h for each of H relevant traits, weighted according to its salience wh ) separating the individual from a group prototype. The individual’s measure of each trait h is qhi , and the group prototype’s measure q¯ hG is fixed at the average of all group members’ qhi values along all characteristic dimensions. These dimensions may include any traits individuals consider relevant, with one exception. Pre-tax income is admissible (though not required) as a distance dimension, while taxes and redistribution (and, consequently, income net of taxes and redistribution) are the only traits ruled out.3 Social identification also induces utility gains from the status of an identified group – SG (t). This captures individuals’ tendency to identify more readily with groups of higher social standing (Wann and Branscombe, 1990; Ellemers, 1993), and their desire to work at enhancing group status when it is low (Doosje et al., 1995). As material wealth is likely to contribute in some form to any group’s standing, status is assumed to depend at least in part on its members’ income net of taxes and redistributive payments, and can be further decomposed into: SG (t) = s0G + s1G p˜ G (t)

(3)

where s0G and s1G are positive constants. In this specification, s0G captures any exogenous determinants of status unconnected to net income. The remainder of the expression, scaled by s1G > 0, is the endogenous component of status, dependent on the tax rate. The function p˜ G (t) is some measure of the material payoff to members of G, net of any taxes and redistributive payments, given the prevailing tax rate. This might take the form of a focus on the lowest payoff received by a group member following Rawls (1971), or some other (un)weighted average of all group members’ payoffs. Throughout this article, the relevant measure is assumed to be the simple, unweighted mean of net income to members of one’s identified group, i.e. p˜ G (t) = pG (t), (see also Abel, 1990; Ljungqvist and Uhlig, 2000; Shayo, 2009). As modeled here, status is an absolute characteristic in the sense that the measures of status for each group are assessed in isolation from one another. The model can, however, be extended to allow for a relative status concept, i.e. status depending on the group’s advantage over another group. Beyond amplifying their magnitudes, this leaves the main inferences unaffected. Collecting the above, each individual’s overall utility combines her material payoff net of taxes and redistribution with status gains

2 Alternatively, one might consider people as being driven by status motivations. This would imply that “utility depends positively on the difference between the individual’s own status and the status of others” (Akerlof, 1997, 1008, italics added). We return to such potential status motivations – and the feelings of envy often associated with them (Frank, 1985; Konrad, 2004; Mui, 1995) – below. 3 While this exclusion helps keep the model tractable, it is also driven by pre-tax income being arguably a more persistent individual characteristic (and thus a more likely source of comparison between group members) while net income appears more relevant to group status (see below). Without this assumption, the insights of the model remain the same, but are less intuitive to present as the identification threshold in equation (14) below becomes more of a moving target, with both status and distance measures dependent on t.

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and distance losses from her identifications with local and federal groups. The utility function takes the form:     Ui (t, gi ) = pi (t) + miL cL SLi (t) − dL diLi + miF cF SF (t) − dF diF

(4)

in which pi (t) reflects individual i s net income, diG denotes the distances that i perceives between herself and her identifiable groups, G ∈ {Li , F}, SG (t) denotes the status of group G under the prevailing tax rate (as given in Eq. (3)), and cL , cF , dL , and dF are positive constants.4 Note that canonical results on (strictly self-interested) individuals’ preferences for redistribution – e.g. Meltzer and Richard (1981) – follow from the special case of this model in which agents are indifferent to group considerations, i.e. miL = miF = 0. 2.1.3. Solution concept Under the utility function (4), individual i s wellbeing is dependent in part on the extent to which she ‘chooses’ to identify with each of the two social groups to which she belongs. These are not necessarily conscious choices. Rather, following Shayo (2009), identification with a given group may best be understood as a condition for what he terms a social identity equilibrium (SIE): a fixed point at which “(1) each individual’s behavior is consistent with his or her social identity, (2) social identities are consistent with the social environment, and (3) the social environment is determined by the behavior of the individuals” (Shayo, 2009, 147). Individual behavior encompasses votes over preferred tax rates, social identities encompass individuals’ group identifications, and the environment encompasses the prevailing tax rate. Thus, all profiles of group identifications gi are individually optimal in any SIE, given the tax votes of all other individuals. Likewise, each SIE tax vote ti is individually optimal given gi . More formally, a SIE exists for a profile of tax rate votes t = (ti )i=1,. . . ,N and a profile of individual group identities g = (gi )i=1,. . . ,N where, for all i = 1, . . . , N we have ti , gi = (miL , miF ), and    





 pi f ti , t−i + miL cL SLi f ti , t−i − dL diLi + miF cF SF f ti , t−i − dF diF    





 ≥ pi f ti , t−i + miL cL SLi f ti , t−i − dL diLi + miF cF SF f ti , t−i − dF diF (5)

for all ti , miL , and miF . Here, the function f{ • } reflects the voting mechanism that determines the winning tax rate t from the N individual tax votes ti . Given our assumption of a median voter framework, f{ • } simply selects and enacts the median of all individuals’ preferred tax rates. As any SIE thus constitutes a Nash mutual best reply in pure strategies in both gi = miL , miF and ti for all individuals i, calculating each individual’s equilibrium group identification and preferred tax rate is straightforward. Yet, in identifying stable equilibria, it will be helpful to establish that no individual believes her tax vote

4 The assumed positive dependence of i s utility on the status of an identified group (i.e. cG > 0) directly implies that she benefits from an increase in the average net income within her group (as this buttresses the group’s status, see Eq. (3)). Individuals thus feel some degree of altruism towards the other members of their identified group (in the sense of Becker, 1981, Konrad, 2004). However, since an increase in pG (t) for a given level of pi (t) diminishes one’s relative net income position within a group, it might arguably also cause envy and reduced utility (often referred to as a ‘keeping up with the Joneses’ effect; Abel, 1990; Ljungqvist and Uhlig, 2000). While such envy is certainly a relevant part of human nature in a wide variety of settings (Frank, 1985; Mui, 1995; Konrad, 2004), experimental studies illustrate that group identification undermines it. Chen and Li (2009, 432), for instance, show that “participants matched with an ingroup member show [47%] more charity when their payoffs are higher, and [93%] less envy when they are behind in earnings.” Hence, altruism is likely to dominate envy when it concerns one’s identified group, which supports our modeling approach.

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ti is decisive in determining the actual, enacted rate t. The absence of such a belief would be expected, among rational agents, if in fact none could be decisive. This impossibility is easily achieved by imposing mild restrictions on the sizes and heterogeneity of the regions’ populations; we return to these in more detail below. The consequence is that, in settling on an equilibrium gi , individual i takes the prevailing t as given, while her individual tax vote ti will be chosen optimally given gi . 2.2. Preferences over redistribution With the ‘choices’ of preferred tax rates and optimal group identifications thus effectively separated, we focus on each in turn. We turn first to the tax decision, taking identities as given. Given her identification with gi , individual i s preferred tax rate is that which would, if enacted, maximize her utility in equation (4) in t. As such, substituting Eqs. (1) and (3) into Eq. (4) and deriving with respect to t, her preferred tax rate will be: yi + miL cL s1L y¯ Li + miF cF s1F y¯ ti∗ = 1 − 1 + miL cL s1L + miF cF s1F y¯

(6)

where y¯ Li is the average income of members of i s local region Li .5 This immediately suggests that ti∗ is: i) common to all individuals from the same region who share a given pre-tax income level yi and group identity profile gi ; ii) decreasing in individual pre-tax income yi for a given group identity profile; and, at least for some income distributions, iii) decreasing in the average income within some identified groups. In other words, and in line with standard economic understanding of human behavior, individuals are less supportive of redistribution given an increase in their own income – and perhaps also given an increase in the average income of a group they identify with. We examine these tax preference implications of group identification in detail below.6 2.2.1. Redistributive support and jurisdictional identification The preferred tax rate given in Eq. (6) yields key predictions linking individuals’ preferences for redistribution to their levels of regional and federal identification. These are illustrated here for the federation, although corresponding (and mirrored) results apply for regional identification (see the online appendix). Deriving Eq. (6) with respect to mF yields:







yi + miL cL s1L y¯ Li + miF cF s1F y¯ cF s1F − 1 + miL cL s1L + miF cF s1F cF s1F y¯ ∂ ti∗ = 2 F ∂m 1 + mL cL s L + mF cF s F y¯ i

1

i

1

(7)

This is strictly positive if and only if the numerator is strictly positive; that is, because cF s1F > 0, whenever   yi + miL cL s1L y¯ Li > 1 + miL cL s1L cF s1F y¯ .

5

(8)

Mathematical derivations and proofs are found in the online appendix. It is clear from Eq. (6) that all individuals with positive income will prefer tax rates less than one. Effectively, even an individual with zero income would prefer a tax rate less than one so long as she identified with at least one group containing some member(s) with strictly positive income. Moreover, it follows from Eq. (6) that preferred tax rates will be strictly positive whenever y¯ − yi + miL cL s1L y¯ − y¯ Li > 0 and strictly negative whenever the inequality is reversed. Thus, positive redistribution must be preferred by some individuals, including (but not necessarily exclusively) those individuals whose incomes are lower than average and who reside in regions where incomes are lower than average. Meanwhile, some others – among them wealthier individuals in wealthier regions – will prefer strictly negative tax rates. 6

This is identical to the condition yi > y¯ + miL cL s1L (y¯ − y¯ Li ).

(9)

Inequality (9) must be satisfied for at least some individuals in regions whose mean incomes exceed the mean income for the federation, i.e. y¯ Li > y¯ . These individuals must necessarily include the richest in such a region, from the top of the regional income distribution down to the threshold defined in inequality (9). For these individuals in wealthier regions, then, the preferred tax rate is strictly increasing in their level of identification with the federation. Similarly, inequality (9) is reversed in poorer-than-average regions for those individuals with endowments below the threshold, including (at least) the poorest in these regions. Thus, for at least some in poorer regions, the preferred tax rate is strictly decreasing in their level of identification with the federation. The rationale is found in the sense of altruism which individuals direct towards other members of their identified groups. A poor individual from a poor region who has only a low sense of federal identification is little troubled by taxing wealthier inhabitants of other regions. An increase in her feelings of federal identification blunts her willingness to appropriate income from other regions to fund redistribution to her own benefit. Similarly, in switching from lower to higher federal identification, a high-income resident of a wealthy region would become more concerned with the poorer residents of other regions, and would consequently be less averse to having her own income taxed away to their benefit. The model therefore unambiguously predicts that specific patterns of social identification – namely, greater federal identification – lead (at least) low-income individuals in poorer regions and (at least) high-income individuals in wealthier regions to act (i.e. to vote) against their narrowly defined, material self-interest.7 Proposition 1. In regions with average incomes above the federal mean, support for redistribution is increasing in federal identification among at least the wealthier individuals. Proposition 2. In regions with average incomes below the federal mean, support for redistribution is decreasing in federal identification among at least the poorer individuals.8 Analogous, but reversed, predictions can be formulated for any individuals who do not satisfy the thresholds suggested by inequality (9), i.e. any sufficiently poor individuals in rich regions (for whom redistributive support decreases in federal identification) or any sufficiently rich individuals in poor regions (who see redistributive support increase with federal identification). Such individuals are not certain to exist for all model parameterizations and distributions of income, however – see below for details – and Propositions 1 and 2 are emphasized to convey the essence of social identity considerations moving agents to act against their own evident pecuniary interests. Further, the identification effects given in Propositions 1 and 2 are strongest at the extremes of individual income. The cross partial derivative of ti∗ from Eq. (6) with respect to both mF and yi is strictly positive for all individuals, irrespective of their own social identities, incomes, the broader income and population distributions, and all other model parameters (see the online appendix for proofs). This ensures that federal identification’s positive effect on redistributive

7 National identification thus need not always increase support for redistribution, as hypothesized by the national-identity-as-social-glue literature in political science (see e.g. Marshall, 1950; Miller, 1995; Johnston et al., 2010; Wright and Reeskens, 2013). 8 A table in the online appendix summarizes the model’s main predictions.

J. Holm / Journal of Public Economics 143 (2016) 39–48

support in rich regions (Proposition 1) will increase as one moves up the income distribution. Meanwhile, in poor regions (Proposition 2), federal identification’s negative effect on redistributive support will be most pronounced among the poorest individuals. It is intuitive that the strongest effects are expected among these extreme cases of rich individuals in rich regions or poor individuals in poor regions, as their comparatively unambiguous status as net donors or recipients in the redistributive scheme aligns inter- and intra-regional strands of altruism. Proposition 3. In all regions, and for all individuals, the effect on redistributive support of federal identification becomes more positive (or less negative) as individual income increases.

2.2.2. Redistributive support and regional wealth In contrast to individual wealth, the implications of the average wealth of an individual’s region are more nuanced. It crucially interacts with individual wealth in its effects on both base levels of redistributive support and federal identification’s impact on redistributive support. First, the partial derivative of ti∗ from Eq. (6) with respect to y¯ Li is positive whenever miL = 0. For individuals with miL > 0, this derivative is strictly negative for sufficiently poor individuals across both rich and poor regions; the threshold is yi < miL cL s1L ∀J=Li yj , where the summation term is the combined income NLi j of all individuals in all regions other than i s own. It is strictly positive whenever an individual is wealthy enough that the inequality is reversed. Intuitively, this threshold captures tradeoffs between costs and benefits of redistribution accruing to i individually and to others in i s region. The result is that, in any region, increased aggregate regional wealth may lead individuals’ redistributive support to either increase (among sufficiently wealthy individuals) or decrease (among sufficiently poor individuals). Details regarding these bounds (and those to follow) are found in the online appendix. A second result follows for the same subsets of individuals across both rich and poor regions. The cross derivative of ti∗ with respect to mF and y¯ Li is strictly positive for sufficiently poor individuals and strictly negative for sufficiently rich individuals; the threshold remains that given in the preceding paragraph. Thus changes to regional wealth may moderate Propositions 1 and 2 for sufficiently rich and poor regions, respectively. In rich regions, for sufficiently rich individuals, increased regional wealth may diminish federal identification’s positive effect on redistributive support. In poor regions, for sufficiently poor individuals, increased regional wealth may make federal identification’s negative effect on redistributive support less negative. Proposition 4. Across all regions, for individuals who are sufficiently poor relative to people in other regions and/or who identify strongly with their own regions, an increase in the wealth of others in their own region is associated with: a) decreased support for redistribution b) a less negative (or more positive) effect of federal identification on redistributive support. For individuals who instead are sufficiently wealthy relative to people in other regions and/or who identify less with their own regions, both a) and b) are reversed.

2.2.3. Redistributive support and regional population Turning next to the relative populations of the regions, we examine the partial derivative of i s preferred tax rate in Eq. (6) with respect to the size of her region, NLi . The resulting term is strictly

43

positive whenever i s region is wealthier on average than the federal mean y¯ and strictly negative whenever the region is poor, as detailed in the online appendix. Thus, holding fixed their social identification, individuals’ redistributive support depends directly on the population of their regions, conditional on the regions’ relative wealth or poverty. Examining the cross partial derivative of ti∗ with respect to mF and NLi reveals how social identification and regional size interrelate in influencing preferences for redistribution. Intuitively, individuals in a wealthy ‘donor’ region whose federal identification makes them willing to support other regions could accomplish that same level of support at a lower rate of taxation if their own region were to grow. Alternatively, they would prefer a higher tax rate if an increase in the size of recipient regions served to dilute the effect of a given level of cross-regional support. Analogous reasoning, with signs reversed, follows for the tax preferences of individuals in regions poorer than the federal mean. Taken together: Proposition 5. If an individual’s region is wealthier (poorer) than the federal average, an increase in her region’s share of the federal population is associated with: a) increased (decreased) support for redistribution b) a less positive (less negative) effect of federal identification on redistributive support.

2.2.4. Redistributive support under substitutable group identifications Thus far it has been assumed that the strengths of each individual’s group identifications mL and mF are independent, and no particular bounds have been imposed. It is worth considering the important alternative case in which a stronger identification with one group necessarily implies a weaker connection with the other. Such substitutability can be motivated by considerable social science research; see e.g. Ashforth and Johnson (2001). Here this relation is operationalized by defining mF = 1 − mL and mL ∈ [0, 1], so that the utility function (4) becomes:      Ui (t) = pi (t) + miL cL SLi (t) − dL diLi + 1 − miL cF SF (t) − dF diF (10) and the resulting preferred rate of taxation is: ti∗

yi + miL cL s1L y¯ Li + 1 − miL cF s1F y¯ =1− 1 + miL cL s1L + 1 − miL cF s1F y¯

(11)

All of the propositions derived above for independent identities continue to hold when regional and federal identities are substitutes. There is a single revision worthy of note: Proposition 4b becomes generalized to all individuals, not only those below an income threshold. Elsewhere, admitting substitutable group identifications at most affects the bounds for the income intervals over which some propositions hold, or the magnitude of the effects predicted. The only new condition required is that cL s1L and cF s1F be similar.9 Still, upon assuming substitutable group identities, an important generalization results. When mF = 1 − mL and cL s1L and cF s1F are similar, Propositions 1 and 2 necessarily extend to the entire populations of regions above and below the federal mean income, respectively. To illustrate this, we derive the new preferred tax rate

9 That is, the utility salience of the material payoff to others in the region which follows from regional identification (of a given strength) be similar to the utility salience of the material payoff to others in the federation which follows from federal identification (of the same strength). Details in the online appendix.

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J. Holm / Journal of Public Economics 143 (2016) 39–48

in Eq. (11) with respect to miF = 1 − miL . The derivative is strictly positive if and only if: cF s1F (yi − y¯ ) − cL s1L yi − y¯ Li > cF s1F cL s1L y¯ − y¯ Li

(12)

and strictly negative whenever the inequality is reversed. The righthand side must be positive in poor regions and negative in rich regions. For cL s1L and cF s1F similar, the left-hand side of inequality (12) must be negative in poor regions but positive in rich regions. That is, for all people in rich regions, regardless of their individual levels of income and the specific distribution of income across regions, federal identification brings an increase in redistributive support. In poor regions, the negative relation between federal identification and redistributive support is similarly generalized, extending even to the wealthiest individuals. Consequently, the emphasis has thus far been on independent levels of group identifications to make clear that none of the above propositions depend upon federal and regional identities being at odds. Indeed, they extend to substitutable identities as something of a special case.10 2.3. Optimal jurisdictional identification The previous section was primarily concerned with the effects on redistributive preferences of certain social identities. We now turn to the likelihood of those identities to arise. In keeping with the definition of Social Identity Equilibria from Shayo (2009), and consistent with reasonable beliefs in a large voting population, all individuals are assumed to take the prevailing tax rate t as given, independent of their own votes. Then, as is evident from the original utility function (4), where federal and regional identification levels are independent, i will identify with either group to the maximum extent possible whenever the utility derived from its status outweighs the disutility associated with the distance she perceives to other members, i.e. cF SF (t) > dF diF

(13)

for federal identification and similar for regional identification. Whenever the distance is instead seen as too great relative to a group’s status, i will identify to the minimum extent possible. Clearly, a constraint will inject more economic interest; we return to the previous section’s substitutable relationship between federal and regional identification, with mF = 1 − mL and mL ∈ [0, 1]. It then follows that i will identify exclusively with the federation (miL = 0; “pure federal identification”) whenever cF SF (t) − dF diF > cL SLi (t) − dL diLi

(14)

and exclusively with her region whenever the inequality is reversed. It will generally be the case that diF > diLi ; that is, individual i will typically perceive a greater distance to the federation than to the region. The reason is that the federal and regional groups are effectively “nested or embedded” within each other, with regional identification as the more specific, “lower-order” identity and federal identification as the more inclusive, “higher-order” identity (Ashforth and Johnson, 2001, 32). In such settings, “individuals will tend to perceive that they have more in common with those who share the [lower order] identities” (Ashforth and Johnson, 2001, 35).

10 Note that, when federal and regional identifications are direct substitutes, the propositions above are clearly reversed with regard to the effects of regional, rather than federal, identification. Otherwise, when these identifications are independent, all of the inferences above regarding federal identification have direct regional parallels. Because of the symmetry of federal and regional terms in the utility function, these are not elaborated upon here.

Difference dimensions pertinent to intra-regional comparisons are indeed likely to be a strict subset of those pertinent to inter-regional comparisons, as looking across regional boundaries will typically introduce additional sources of distinction like customs or dialect. It follows from inequality (14), then, that whenever the federation’s status is sufficiently high relative to the region’s status that it outweighs the greater distance individual i perceives to the federation than to the region – i.e. whenever cF SF (t) − cL SLi (t) > dF diF − dL diLi – she will identify exclusively with the federation in equilibrium. When the inequality is reversed, individual i instead identifies exclusively with her region.11 In addition to the propositions regarding preferred levels of redistribution found in the previous section, the model also provides novel insights at the level of individual propensities regarding jurisdictional identification. These derive from the tradeoff between regional and federal identification facing each individual under inequality (14). First, consider two individuals in two different regions facing this identification tradeoff, identical in every respect other than the average income levels of their regions. Since the federal ‘option’ facing both of them is the same, federal identification would confer the same status-derived utility to either. Therefore the federation must be a more compelling alternative for social identification relative to the region, all else equal, when the region is lower in status. To the extent that regional wealth and regional status correspond, this means that the individual from the poorer region is expected to identify federally ‘sooner’ than the individual from the wealthier region: the federation needs to clear a lower status threshold in order to attract identification by residents of the lowerstatus region than it does to attract identifiers from the higher-status region. The implication is that, ceteris paribus, federal identification is expected to be decreasingly common in a region as that region’s overall level of income rises. The online appendix shows formally that this expectation is particularly strong: a) for individuals whose incomes are high relative to their regional means, but not excessively high relative to the federal mean; b) when NLi is small relative to N or dL cL s1L is at least similar in magnitude to dF cF s1F ; and c) when i s perceived distance to the federation is large relative to the distance to her region. Alternatively, these conditions are neatly circumvented when gross incomes are not a (significant) part of individuals’ perceptions of social distances; in this case, the prevalence of federal identification decreases in regional wealth for all individuals. Together, these lead to: Proposition 6. Particularly among individuals with more than their regions’ average wealth, and holding fixed relative populations and other regional characteristics, federal (as opposed to regional) identification will likely be less widespread in regions with higher levels of aggregate income. For others, with incomes below their regional means, the net result depends on the relative magnitude of two effects of increasing regional wealth: for instance in a relatively poor Li , the federation is perceived as less distant relative to the region as regional wealth increases it is also less attractive as a ‘target’ for identification relative to the region. Direct empirical tests of this proposition may, however, be confounded by the other aspect of Eq. (14) relating individuals to their social groups: perceived distance. Suppose, for the sake of illustration, that two identical individuals in different regions faced identical status differentials between the federation and their

11 Note also that Eq. (14) can still be satisfied even for inhabitants of a wealthier region – who experience a higher level of the endogenous component of status in Eq. (3) – as long as either i) the federation has a sufficient advantage over that region g in exogenous status (s0 i in Eq. (3)) or ii) divergences in federal and regional values for c and d contribute to ‘favoring’ federal identification.

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respective regions. Then the individuals who perceive the federation as less distant relative to their own region would be expected to identify federally ‘soonest.’ A key driver of the perceived distance to the federation is the dilution of traits characteristic of the local region in the larger pool of the federation. Thus, all else equal, individuals from more populous regions – necessarily nearer the federal archetype – are more likely to identify federally. As shown in the online appendix, this must be the case for all people in regions which are wealthier than the federal mean, provided cF s1F is at least similar in magnitude to cL s1L and they perceive less social distance to their region than to the federation. In poorer regions, the net result depends on which effect dominates: making a poor region larger reduces the distance its inhabitants perceive to the federation, but also makes the federation comparatively less attractive as an identifiable group. Thus: Proposition 7. Among wealthier regions, and holding fixed aggregate income and other regional characteristics, federal (as opposed to regional) identification will be more widespread in regions which account for larger shares of the federal population. The same will hold among poorer regions if their inhabitants perceive proximity to a more similar federation as more salient than the loss of federal status as average income decreases. The previous two propositions will not be straightforward to disentangle in practice when few regions comprise a federation – size and incomes of regions are difficult to manipulate. However, where the differences in regional size and income happen to coincide – i.e. where one region is both significantly larger and wealthier than the other(s), as is the case with western and eastern Germany, or with Flanders and Wallonia in Belgium – some insight may be obtained regarding which effect dominates. The excess distance perceived to the federation in comparison to the local region depends not only on the relative population sizes of the regions, as reflected in Proposition 7, but also on the underlying, individual traits which define distance. An individual will naturally see the federation as increasingly distant, relative to the region, whenever she and the other constituents of the local region are increasingly distinct from the inhabitants of other regions (i.e. when trait measures q diverge across regions), or whenever their distinction is made more salient (i.e. when the characteristics’ weights w increase); see Eq. (2). Prevalence of federal identification should thus be lower, all else equal, in regions less like the federal ‘type.’ Conversely, federal identification should be more widespread, at least among the local majority, when the region becomes more internally diverse in traits relevant to social distance, or when those traits become more salient. See the online appendix for further discussion. Proposition 8. Holding fixed regions’ sizes and aggregate incomes, the prevalence of federal (as opposed to regional) identification in a region will be: a) decreasing in (the salience of) the dissimilarity of the region’s inhabitants to people elsewhere in the federation in terms of relevant socio-economic traits b) increasing in (the salience of) the trait heterogeneity of the region itself, particularly among the local majority when heterogeneity is realized as an increased local minority share.

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identities, and that a mechanism selects the median rate voted and enacts it as the prevailing t. Consider the smallest possible bloc of individuals which can be defined as electorally decisive in the sense that two criteria are satisfied. First, regardless of how they identify, all individuals not in the decisive bloc always prefer tax rates which are either: a) higher than the highest preferred tax rate of any member of the bloc, under any identification, or b) lower than the lowest preferred tax rate of any member of the bloc, under any identification. Second, neither of the voter tiers outside of the bloc is itself large enough to contain the federation-wide median voter; the median voter is always situated inside the bloc. Suppose that this decisive bloc consists exclusively of individuals who are either all from regions richer than the federal mean, or all from regions poorer than the federal mean. In each instance, up to two types of voting outcomes – very broadly defined – may result. In rich-region decisive blocs, either federal identification is widespread, leading many people to prefer (and vote) a relatively high rate of redistribution, or else comparatively few people identify federally, and accordingly there are more votes for relatively low rates. When instead voters from poor regions comprise the decisive bloc, the pattern reverses. Restricting the bloc to either exclusively rich-region members or exclusively poor-region members ensures that any vote shifts resulting from ‘changes’ in identification are all in the same direction. Where such shifts alter the federation-wide median vote, either a higher or lower rate of redistribution can prevail depending on group identification patterns among the decisive bloc. For concreteness, suppose the decisive bloc is perfectly homogeneous – all members share a region and an individual endowment level, along with other social traits.12 Then, with regard to the federal identification threshold (14), they must all face the same trade-off between status and distance considerations for their two (identical) identifiable groups. Hence, facing the same redistributive regime, they must all identify in the same way. Given this uniformity of identification within the bloc, as well as a common level of individual income, by Eq. (6) they will all prefer – and vote – an identical tax rate. If the decisive bloc is in a poor region, the rate under regional identification will be relatively low and the rate under federal identification relatively high; in rich-region decisive blocs, the reverse holds. Because the decisive bloc necessarily contains the federal median, the rate preferred by this homogeneous decisive bloc must be enacted as the prevailing federal t. Where this prevailing t is also consistent with their ‘choice’ of either federal or regional identification, the circle is closed, and the conditions for a social identity equilibrium Eq. (5) are satisfied within the bloc. For other voters, who by definition cannot be decisive in setting t, the SIE conditions are satisfied whenever their identities are individually optimal according to threshold (14), taking as given the tax preferences within the bloc, and their own tax preferences are individually optimal given their identities, following Eq. (6). At least one such equilibrium will assuredly exist, and be stable, given a homogeneous decisive bloc of more than two voters. For any given t, each individual throughout the federation will have some identity gi which is optimal under threshold (14) – if one group is not at least weakly preferable, then the other must be.13 In turn, each gi will cause some ti∗ to be preferred. Within the decisive bloc, there must exist cases in which all voters identify the same way and thus vote the same way, with gi and ti∗ mutually optimal. This rate is enacted as t and taken as given outside the decisive bloc; equilibrium exists whenever all gi are individually optimal given t and all ti∗ are

2.4. Social identity equilibrium With individually optimal tax preferences and social identities in place, we are now in a position to address the existence and characterization of equilibria across the federation. Recall that all individuals sincerely vote their preferred tax rates, given their group

12 Clearly, the assumption of perfect within-bloc homogeneity is very stringent. From an empirical perspective, tests of the model will require extensive controls for background characteristics. 13 Provided that all ties are resolved in the same manner, the exact nature of the tie-breaking rule to settle cases of indifference between both possible identities is unimportant.

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individually optimal given gi . Within the decisive bloc, no member can profit through unilateral deviation given the (homogeneous) votes of other members. Any equilibrium to emerge, then, is reflective of the redistributive preferences – and, in turn, the social identities – of the individuals who are influential in setting provision levels.14 Aggregating the first three propositions derived above to the level of federal equilibria: Proposition 9. To the extent that federal redistributive policies reflect the preferences of individuals in rich (poor) regions, those policies will be increasing (decreasing) in the prevalence and intensity of the individuals’ federal identification. These effects will be particularly strong when individually rich (poor) people are influential. A very similar result follows from Proposition 5a regarding the population shares of rich (poor) regions. For additional insight into the significance of income and population distributions as determinants of both identity and redistribution, we turn to an analysis of the model’s comparative statics. 2.4.1. Comparative statics Among the regional characteristics considered thus far, the equilibrium policy effects of regional wealth are the most ambiguous. The direct effects of regional wealth – holding identities fixed – are clear enough from Proposition 4a: across both rich and poor regions, rising regional wealth reduces redistributive support among individuals sufficiently poor relative to other regions, and increases it among individuals sufficiently rich relative to other regions. Yet Proposition 6 introduces indirect effects of regional wealth, operating via the channel of changes in identities, which confound the picture. Proposition 6 suggests that increasing regional wealth likely reduces the prevalence of federal identification, especially among those wealthy relative to their regions. But these individuals may overlap with those who, by Proposition 4b, see a larger gain in redistributive support, if they identify federally. So, when regional wealth increases, federal identification may simultaneously become less common, yet cause a larger increase in redistributive support among those individuals who still do identify federally. The net result on tax votes is uncertain in richer regions whose preferences influence policy. There is more clarity in poorer regions when regional income rises, particularly under substitutable (rather than independent) identities: federal identification is likely to both become less common and to cause a smaller reduction in preferred tax rates. Still, if poor or regionalist voters in these poorer regions are decisive in setting policy, then actual redistribution falls as the regions become less poor. An increasing regional population share has more straightforward implications for redistributive policy, particularly in (influential) richer regions. There, it both increases redistributive support directly (Proposition 5a) and makes federal identification (with its boost in redistributive support; Proposition 1) more common (Proposition 7). While Proposition 5b suggests that the intensive marginal effect of the redistributive boost will be negative, it is not clear that this will outweigh the more general shift in preferences and the changes at the extensive margin of federal identification. The net effect is somewhat less distinct for (influential) poorer regions,

14 It is apparent that the median voter framework limits the policy relevance of individuals’ social identities to only those voters who belong to the decisive bloc – others are unable to alter the prevailing t, due to identity considerations or otherwise. While worthwhile (and necessary) to establish t∗ values preferred by the decisive bloc as the enacted t, this restriction very likely abstracts from real-world policy influence of voters further from the median and hence not part of a monolithic, decisive bloc. Accordingly, much of the continuing discussion is phrased in terms of ‘influential’ voters rather than decisive blocs.

since there the role of regional population in determining the prevalence of federal identification depends on status and social distance effects. Still, leaving aside the federal identification effect’s margins, in poor regions the general effect of an increasing regional population aligns with the (negative) effect on redistributive support of those who do identify federally. The role of trait heterogeneity across and within regions is again more clear. As a region of any income level becomes more distinct from the rest of the federation, federal identification becomes less common (Proposition 8a). So, following Propositions 1 and 2, redistribution decreases as (influential) rich regions become more distinct and increases as (influential) poor regions become more distinct. When instead any region becomes more internally heterogeneous, federal identification is likely to become more common (Proposition 8b). Thus actual redistribution increases in the internal diversity of (influential) rich regions and decreases in the internal diversity of (influential) poor regions. 2.4.2. Multiple equilibria Several implications follow from the characterization of equilibria, differentiating redistribution models incorporating social identification from those without. The first of these is the possible existence of multiple equilibria. For some population and income distributions, both ‘high tax’ and ‘low tax’ types of equilibrium may be sustainable simultaneously. Within the decisive bloc, high redistributive preferences may be individually optimal given one identity, while at the same time low redistributive preferences are individually optimal given the other identity; this is illustrated in a figure in the online appendix. Two otherwise identical federations, then, might be expected to differ both in their redistributive policies and in the social identification patterns of their populations. This possibility may help explain the contradictions which often arise among empirical analyses relating social (particularly national) identification to redistribution. Further, beyond rationalizing the absence of a simple empirical relation between identity and redistribution, the model suggests a more complex – yet testable – underlying relation. Specifically, the sign of federal identification’s effect on redistributive support is hypothesized to depend crucially on the aggregate wealth of regions whose inhabitants are influential in setting redistributive policy. 2.4.3. Nonmonotonicities A second consequence of the equilibrium results is the possibility that the prevailing level of redistribution is nonmonotonic in income inequality. Standard models following Meltzer and Richard (1981) hold that, as the disparity between high- and low-income individuals becomes greater, a democratically-determined scheme redistributing endowments among them must do so at (at least weakly) increasing rates. While this is likewise often the case in the present model, important exceptions exist. In keeping with standard models, redistribution is typically monotone in the inequality of individual incomes provided changes in the income distribution fall uniformly across all regions. For distributional changes which affect the relative wealth of regions, however, there exist instances where an increase in income imbalances results in a lower equilibrium t. Consider a federation with a decisive voting bloc consisting of individuals from some region(s) poorer than the federal mean, of any personal income level. Beginning in an equilibrium wherein all individuals in this bloc prefer (and hence the voting mechanism enacts) the higher of their two possible tax rates; they necessarily also identify with the social group which corresponds to this higher rate: their region. Now suppose that a change in the income distribution causes a reduction in the wealth of the decisive bloc’s already-poor regions relative to the rest of the federation: cross-regional disparities become stronger at these regions’ expense. This change must bring with it a reduction in these regions’ status, relative to the

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status of the entire federation, as their inhabitants’ average income has necessarily declined more sharply than has the federal mean. This implies that the threshold for federal (rather than regional) identification, i.e. inequality (14), becomes easier to satisfy.15 There must exist starting dispositions in which members of the decisive bloc identify with their regions, but are so near the threshold that an (arbitrarily small) decrease in their regions’ share of aggregate income reverses inequality (14), resulting in a situation in which regional identification can no longer be optimal for members of the decisive bloc. Thus the starting equilibrium no longer exists, and any new equilibrium which emerges must include federal identification and the attendant, lower tax vote by the decisive bloc. In this instance, an increase in (inter-regional) inequality has induced a decreased rate of redistribution. Analogous nonmonotonicities can occur when the decisive bloc’s voters are from regions wealthier than the federal mean. Similarly, when poor-region voters comprise the decisive bloc, redistribution may be nonmonotonic in their regions’ shares of the federal population. A decrease in this population share has two effects relevant for voters in poor regions: i) they perceive a greater distance to the federation (as the salient differences aligned with regional membership become greater), and ii) the federation becomes a more attractive target for identification (its members’ average net income increases, raising the federal group’s status). Status and distance for their own regions are unchanged. If the status effect outweighs the distance effect, the influential voters who identified with their (poor) regions in an initial equilibrium may switch to federal identification, setting a lower equilibrium tax rate as they do. Equilibrium rates of income redistribution have thus decreased in response to a decrease in the total population share of the decisive type’s (poorer) region. Existing empirical evidence on the relation between income distribution and redistributive policy is frequently inconclusive or contradictory (see e.g. Perotti, 1996; Benabou, 2000; Milanovic, 2000; De Mello and Tiongson, 2006). The effects above involving nonmonotonicities of redistribution in the size and relative poverty of certain (income-aligned) voting blocs may go some distance towards accounting for this ambiguity. The model also makes clear predictions regarding identification-linked drivers of these effects, which will allow for empirical verification. 3. Concluding discussion It has been argued in this article that support for redistributive policies within heterogeneous federations critically depends upon individuals’ attachment to their country relative to their attachment to a geographically more proximate region. Federal (as opposed to regional) identification can lead individuals to shift their redistributive preferences in directions at odds with their narrowly-defined personal economic interests. In particular, it decreases support for redistribution in poorer regions, but increases it in richer regions. These results are relevant to a number of related literatures. First, they further develop our growing understanding of the costs and benefits of multilevel governance structures (Seabright, 1996; Myerson, 2006; Hatfield and Padro-i-Miquel, 2012; Geys and Vermeir, 2014; Balcells et al., 2015). Particularly, the model’s

15 Strictly speaking, both sides inequality (14) may change given a perturbation of inter-regional income inequality. The status gap will change in any event. The difference in group distances will be altered, as well, to the extent that the change in income inequality impacts perceived distance to the federation. Perceived distances to the federation must become greater, while those to the region are unchanged. Still, even where both status and distance effects are countervailing (for decisive types in poor regions but not in rich regions), the former is very likely to dominate the latter. Exceptions would require gross income to be considerably more salient to distance than net income is to status.

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implications shed new light on the fierce debates which often surround redistributive financial flows across regions within a federation. It is argued here that individuals’ jurisdictional identification can help explain the nature and drivers of such debates. Second, the present model adds to the literature on the determinants of redistributive preferences. National identification – and the formation of a national identity – has often been cited as a basis for fostering support for the welfare state by serving as a ‘societal glue’ (Marshall, 1950; Miller, 1995; Johnston et al., 2010). From the analysis here, it becomes clear that national identification and support for the welfare state need not always go hand in hand, and that much depends on individuals’ attachment to income-aligned social groups subordinate to the federation which may offer alternatives to federal identification. This adds to the critical evaluation of this literature in a recent article by Wright and Reeskens (2013). These sub-groups of the federation need not be regions, as they are modeled throughout this article. Formally, the model is a generalization of Shayo (2009), with intra-group income heterogeneity permitting significant new applications to social groups beyond the classes Shayo emphasizes. As such, the predictions derived here pertain equally to other subsets of the federal population, so long as these subsets i) can be strictly ordered according to their members’ average income, and ii) offer identities which are credible alternatives to federal identification. As such, the model could apply also to ethnic, linguistic, or other cultural communities, among others. At the very least, the tension between the two countervailing effects of federal identification – positive in rich subgroups, negative in poor ones – suggests that any empirical investigation into redistributive outcomes or preferences would do well to control for attachments to income-aligned social groups within the federation which present plausible alternatives to federal identification. There are, of course, limitations to the model. First, the assumption of a decisive voting bloc with homogeneous members is undoubtedly strong. One of the trait dimensions along which withinbloc homogeneity has been imposed – that of individual income – is of particular significance. It may be important in empirical applications to take into account individuals’ income not only in absolute terms, but also with respect to certain relevant thresholds, e.g. break-even points between donor or recipient in the redistributive mechanism they face. Additionally, it may be informative in some applications to allow more nuance in the relation between identity tiers. Resentment – modeled perhaps as negative identification – and relative assessments of groups’ status are promising formal extensions, as well. The choice of redistributive mechanism modeled, while a standard in the literature, is only one possibility. Conceptually, the same extension (or withdrawal) of in-group altruism that comes along with federal (or regional) identification will have analogous effects under a regime of transfers explicitly targeted towards certain regions. Indeed, results for such explicit transfer mechanisms might be expected to yield sharper results in practice, as the incidental nature of the inter-regional transfers modeled here was chosen for its generality. Additionally, the model abstains from introducing individuallevel mobility across regions. Epple and Romer (1991) provide an interesting model of regional-level redistribution in a setting where individuals are permitted to migrate, and find sorting effects of households of different income levels into regions with different redistributive regimes. A fruitful extension of the present model might similarly include mobility, although individuals’ jurisdictional identification in our framework is likely to influence their effective costs of migration. It would indeed be natural to assume that federal identifiers are more disposed to migrate than those attached to their region. Other nuances omitted from the model may be particularly relevant in the long term, and when redistributive policies establish

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or reinforce perceived patterns in the relationships among identifiable groups. One particularly intriguing observation is the possibility of what might be termed second-order identity effects of fiscal policy: while policy provision levels may have the first-order effect – described in this paper – of making some identities more or less sustainable by altering their relative status, the policy impacts themselves may affect individuals’ propensities to identify. Perceiving policy costs to those we identify with, for instance – or benefits to those we resent – may strengthen our attachment to in-groups. In Spain, for example, discourse about the level of transfers from Catalonia to other regions has been credited with reinforcing Catalan identity. Similar effects may exist in the cases of Quebec, Belgium, northern and southern Italy, and northern and southern member states of the European Union, among others. More immediately, the theoretical predictions established thus far invite empirical investigation. In a companion paper, Holm and Geys (2016) find considerable supporting evidence in the contexts of Belgium and post-reunification Germany. Further cross-country comparisons will be valuable, both at the levels of individual preferences and policy outcomes. Finally, the model of nested jurisdictions proposed here need not be confined to the setting of regions within a nation-state. Examining more local forms of attachment may also be informative. Arguably more compelling, though, are the higherlevel settings most obviously typified by the European Union and its member states. Testable predictions developed here will have close analogues regarding transfers between countries, bailouts, and any EU-level policies with redistributive characteristics. Acknowledgments The author gratefully acknowledges insightful remarks by Pierre Pestieau and two anonymous referees, as well as helpful comments from Peter Claeys, Kris Deschouwer, Lars Feld, Benny Geys, Mahdi Habibpour, Friedrich Heinemann, Yoshiko Herrera, Bruno Heyndels, Alexander Kemnitz, Kai Konrad, Colin Kuehnhanss, Erik Lindqvist, Espen R. Moen, Martin Pollrich, Ronnie Schöb, Moses Shayo, Roland Strausz, Marcel Thum, Vítˇezslav Titl, Clive Werdt and Elmar Wolfstetter, along with seminar participants at the Higher School of Economics (Moscow), Humboldt-Universität zu Berlin, the Norwegian Business School (BI), and the Wissenschaftszentrum Berlin für Sozialforschung (WZB). In addition, thanks are due for generous financial support from FWO Vlaanderen (grant number: G.0022.12). Appendix A. Supplementary data Supplementary data to this article can be found online at http:// dx.doi.org/10.1016/j.jpubeco.2016.08.005. References Abel, A.B., 1990. Asset prices under habit formation and catching up with the Joneses. Am. Econ. Rev. 80 (2), 38–42. Akerlof, G.A., 1997. Social distance and social decisions. Econometrica 65 (5), 1005–1027. Akerlof, G.A., Kranton, R.E., 2000. Economics and identity,. Q. J. Econ. 115 (3), 715–753. Alesina, A., Baqir, R., Easterly, W., 1999. Public goods and ethnic divisions. Q. J. Econ. 114, 1243–1284. Ashforth, B.E., Johnson, S.A., 2001. Which hat to wear? The relative salience of multiple identities in organizational contexts. In: Hogg, M.A., Terry, D.J. (Eds.), Social Identity Processes in Organizational Contexts. Psychology Press, Philadelphia, pp. 31–48. Ashworth, J., Heyndels, B., Smolders, C., 2002. Redistribution as a local public good: an empirical test for Flemish municipalities. Kyklos 55 (1), 27–56. Balcells, L., Fernandez-Albertos, J., Kuo, A., 2015. Preferences for inter-regional redistribution. Comp. Polit. Stud. 48 (10), 1318–1351. Bechtel, M.M., Hainmueller, J., Margalit, Y.M., 2014. Preferences for international redistribution: the divide over the eurozone bailouts. Am. J. Polit. Sci. 58 (4), 835–856.

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