Tom Palfrey (California Institute of Technology)

Dr. Palfrey's research explores issues at the intersection of political science, economics, and game theory. His theoretical contributions include the development of Quantal Response Equilibrium, a statistical generalization of Nash equilibrium based on stochastic choice behavior. His laboratory experiments have investigated a wide range of topics, including asset pricing, voting, legislative bargaining, public goods, and auctions. He is former President of the Economic Science Association, a Fellow of the Econometric Society, an Economic Theory Fellow of the Society for the Advancement of Economic Theory, a member (Political Science) of the American Academy of Arts and Sciences, and is currently a Visiting Scholar at the Russell Sage Foundation.

 

Title: Equilibrium Tax Rates and Income Redistribution: A Laboratory Study

 

Abstract: This paper reports results from a laboratory experiment that investigates the Meltzer-Richard model of equilibrium tax rates, inequality, and income redistribution. We also extend that model to incorporate social preferences in the form of altruism and inequality aversion. The experiment varies the amount of inequality and the collective choice procedure to determine tax rates. We report four main findings. First, higher wage inequality leads to higher tax rates. The effect is significant and large in magnitude. Second, the average implemented tax rates are almost exactly equal to the theoretical ideal tax rate of the median wage worker. Third, we do not observe any significant differences in labor supply or average implemented tax rates between a direct democracy institution and a representative democracy system where tax rates are determined by candidate competition. Fourth, we observe negligible deviations from labor supply behavior or voting behavior in the directions implied by altruism or inequality aversion