Inequality is usually very persistent – places with high inequality now will almost surely be very unequal in the future. The reasons for this are uncertain – is it power structures, technology, fundamental economic structures, etc. A new paper by Alston, Melo, Mueller and Pereira provides an alternative answer in the context of the recent changes in Brazilian inequality.
Abstract
Social contracts about inequality and redistribution are country-specific. We rely on a model of inequality and redistribution where multiple steady states can emerge in given country. We link the model to the recent literature on beliefs and argue that beliefs are a major determinant of which equilibrium results. We show that changes in beliefs may shift the equilibrium in a country over time. We present evidence that beliefs are typically very stable over time, yet argue that Brazil has recently undergone a dramatic shift in beliefs which we show is associated with a change in the country’s social contract in the past thirty years. The transition from one social contract to another has taken place through a process which we call ‘dissipative inclusion’, where redistribution and social inclusion are effectively achieved but accompanied by distortions, inefficiencies and rent dissipation.
Full paper through the NBER (gated) – Changing Social Contracts: Beliefs and Dissipative Inclusion in Brazil