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Political Economy Problem Set

This document contains the solutions to two problems in analytical politics regarding developing countries. For problem 1, the document calculates the average and median productivity in a population, and determines the majority-winning tax rate under different scenarios when some groups do not vote. For problem 2, the document determines the political equilibrium based on a model of income distribution, finds the optimal redistribution tax rate, calculates the utility function for democracy, and compares it to the utility under no democracy to determine which system the rich will prefer.

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Xi Yang
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29 views2 pages

Political Economy Problem Set

This document contains the solutions to two problems in analytical politics regarding developing countries. For problem 1, the document calculates the average and median productivity in a population, and determines the majority-winning tax rate under different scenarios when some groups do not vote. For problem 2, the document determines the political equilibrium based on a model of income distribution, finds the optimal redistribution tax rate, calculates the utility function for democracy, and compares it to the utility under no democracy to determine which system the rich will prefer.

Uploaded by

Xi Yang
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Analytical Politics II: Developing World

Problem Set 2
Section 2 Xi Yang ID: 12208296
Question 1
0.15∗22+0.31∗20+0.6∗18+0.65∗26+2.5∗14
1. 𝑒̅ = 100
= 𝟎. 𝟕𝟐𝟐

2. Since there are 100 people in total, so the median productivity would be the average productivity of the
50th and 51st people, which is among the 18 individuals have productivity e = 0.6.

So the median productivity in the population is 𝑒 𝑚𝑒𝑑𝑖𝑎𝑛 = 𝟎. 𝟔.

3. Since it’s a majority-winning tax rate, so it should satisfy 𝑒̅ > 𝑒 𝑚𝑒𝑑𝑖𝑎𝑛

𝜏 ∗ (𝑒 𝑚𝑒𝑑𝑖𝑎𝑛 ) = 2𝑏(𝑒̅ − 𝑒 𝑚𝑒𝑑𝑖𝑎𝑛 ) = 4 ∗ (0.722 − 0.6) = 0.488

So the majority-winning tax rate is 0.488.

4. 𝑛′ = 100 − 22 = 78
Since there are 78 people in total, so the median productivity would be the average productivity of the
39th and 40st people, which is among the 26 individuals have productivity e = 0.65. Although the least
productive group does not vote, but the mean productivity will not change.

Since the majority-winning tax rate satisfies 𝑒̅ > 𝑒 𝑚𝑒𝑑𝑖𝑎𝑛′

𝜏 ∗′ (𝑒 𝑚𝑒𝑑𝑖𝑎𝑛′ ) = 2𝑏(𝑒̅ − 𝑒 𝑚𝑒𝑑𝑖𝑎𝑛′ ) = 4 ∗ (0.722 − 0.65) = 0.288

The majority-winning tax rate decreases from 0.488 to 0.288.

̅= 0.15∗22+0.25∗20+0.6∗18+0.65∗26+2.5∗14
5. 𝑒′ 100
= 𝟎. 𝟕𝟏𝟎

𝑒 𝑚𝑒𝑑𝑖𝑎𝑛 = 𝟎. 𝟔
𝑚𝑒𝑑𝑖𝑎𝑛 )
𝜏 ∗ ′′(𝑒 ̅ − 𝑒 𝑚𝑒𝑑𝑖𝑎𝑛 ) = 4 ∗ (0.710 − 0.6) = 0.44
= 2𝑏(𝑒′

The majority-winning tax rate decreases from 0.488 to 0.44. The model predicts a positive correlation
between income inequality (mean - median) and income tax rates, so it indicates that the society has more
income equality.
Question 2
1.
1−𝜃
𝑦𝑝 = 𝑦̅
1−𝜆
𝜃
𝑦𝑟 = 𝑦̅
𝜆
𝑦𝑝 1 − 𝜃 𝜆
= ∗
𝑦𝑟 1 − 𝜆 𝜃
1
2 1−𝜃 4
= ∗
7 3 𝜃
4
𝟕
𝜽=
𝟏𝟑
income share 增⼤大，τ会增⼤大，不不平等增⼤大，就会更更Redistribute
income share = population share, no redistribution
income share=1, τ=1，因为rich 掌握所有财富，poor会要求很⼤大的redistribution
7 1
𝜃−𝜆 − 𝟓
2. 𝜏 ∗ = = 13 4
3 =
1−𝜆 𝟏𝟑
4

𝜃
3. 𝑦 𝑟 = 𝑦̅
𝜆

1
𝜃 13
𝑦̅ = 𝑦 ∗ = 7 ∗ 4 =
𝑟
𝜆 7 4
13
𝑦̅(2 − 𝜆)
𝑉𝐷𝑒𝑚𝑜𝑐𝑟𝑎𝑐𝑦 = 𝑦 𝑟 − ∗ (𝜃 − 𝜆)2
[2𝜆(1 − 𝜆)2 ]
1
13 2−4 7 1 2
=7− ∗ ∗ ( − )
4 1 3 2 13 4
[2 ∗ (4) ]

20475
=7−
12168
≈ 𝟓. 𝟑𝟏𝟕

6
4. 𝑉𝑁𝑜 𝐷𝑒𝑚𝑜𝑐𝑟𝑎𝑐𝑦 = 𝑝 ∗ 𝑦 𝑟 = 10 ∗ 7 = 4.2 < 𝑉𝐷𝑒𝑚𝑜𝑐𝑟𝑎𝑐𝑦

Since the value to the rich from democracy is larger than the value to the rich from not democracy, so the
society will democracy.

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