Tax rates and policies of redistribution vary across countries even within the European Union. People are mobile within the EU and are free to choose where to work and pay taxes. If these policies were fixed, or chosen without any regard to the citizen’s will, one could presume that highly productive people would locate themselves where they face the lowest tax rates, while the unskilled might prefer to live where the social safety net is greatest and other redistributive expenditures are high. But these intuitions break down once we take into account that distributive policies in democratic countries are influenced by the vote of their citizens. While these policies indeed affect the location decisions of agents, they are also affected, in turn, by the changes in majorities that these location decisions imply.
In their Barcelona Graduate School of Economics working paper “Meritocracy, Egalitarianism and the Stability of Majoritarian Organizations” (No. 737) (February 2014), Salvador Barberà, Carmen Beviá, and Clara Ponsatí investigate the interactions between locational and distributive choices, and their consequences on the social composition of countries.
In their setting, individuals with varying productivity levels form groups to perform certain tasks and choose between the two competing principles of how to distribute joint production. Either total production is shared equally (egalitarianism), or according to each individual’s contribution (meritocracy). Within a group individuals vote for their preferred alternative, and consequently the option preferred by the majority is adopted. Someone who is more productive than the group average will want everybody to be rewarded as much as they produce, while someone with below group average productivity will prefer equal pay. In the end the individual with the median productivity within a group will be the decisive one in terms of the chosen reward mechanism.
In that model, stable societies are those where each set of agents in every country find that, relative to other combinations of individuals and reward systems, they are doing their best. In these stable societies, one typically does not observe individuals who are most productive working together in groups with a meritocratic pay rule, and all less productive individuals forming egalitarian groups. Meritocracy and egalitarianism can emerge in groups of any average productivity levels, and stable non-segregated groups may emerge, formed by individuals of diverse productivity levels. So in a society with fewer superstars one is more likely to see integrated groups. Especially a large middle class leads to the occurrence of mixed groups. This phenomenon would not occur if people were forced to use one of the two distributional rules, egalitarianism or meritocracy, or allowed to freely bargain on the distribution of their joint output.
The model admits other interpretations. Groups may be cooperative firms, where all co-owners vote on salary policies. They can be public universities, where rectors can determine pay schedules and are elected by the faculty and staff.
Allowing agents to condition their effort within groups to their expected rewards does not alter the conclusions regarding non-segregation and diversity of regimes. In further research Barberà, Beviá, and Ponsatí are exploring extensions of the model that will incorporate the connections between distributive policies and effort levels, and also allow for choices among a wider class of taxation schemes than the ones considered here, strengthening the link between their work and the general literature on taxation.