NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Inequality Aversion, Populism, and the Backlash Against Globalization

Lubos Pastor, Pietro Veronesi

NBER Working Paper No. 24900
Issued in August 2018, Revised in May 2020
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 tractable equilibrium model in which a populist backlash emerges endogenously in a strong economy. In the model, voters dislike inequality, especially the high consumption of "elites." Economic growth exacerbates inequality due to heterogeneity in preferences, which generates heterogeneity in returns on capital. In response to rising inequality, rich-country voters optimally elect a populist promising to end globalization. Equality is a luxury good. Countries with more inequality, higher financial development, and trade deficits are more vulnerable to populism, both in the model and in the data.

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Document Object Identifier (DOI): 10.3386/w24900

 
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