Income inequality and social conflict

Trabajo presentado en The Future of Inequality: Technology, Political Economy, and Policy, celebrado en la New York University los días 21 y 22 de abril de 2017This talk revisits the link between income inequality and social conflict. Despite its plausibility, such a link fails to find any clear, strong empirical support. I explore a particular variation around the basic rent-seeking model with the goal of obtaining predictions more aligned with evidence (see Esteban and Ray American Economic Review 2008, Journal of the European Economic Association 2011 for another variation). This exercise studies the effect of income inequality in two different scenarios: one, where the payoff to conflict depends on existing levels of inequality itself, and another, where the value of the winner's prize is independent of the income of the players. The first case is one of redistributive conflict, while the second is an idealization of a conflict driven by ethnic considerations, in which political power or religious dominance is the end goal. With ``class confrontation," if there is sufficient inequality, a further increase in inequality deters the poorer group from the engaging in conflict, while simultaneously inducing the richer group to uniformly increase their ``best reply" to any resource contribution of the poor. The net effect is a diminution of conflict. When the payoff from victory does not depend on the income of the players, the effect of increased inequality is different. The group that has seen its income fall becomes more combative and the one with an income increase becomes less so. The model can explain the complex relationship between economic inequality and class conflict, and the observation in Mitra and Ray (Journal of Political Economy 2014) that an equalization of group incomes may intensify ethnic conflict.N