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level of economic specialization of the regional economy.
6
This is consistent
with earlier contributions and, in substantive terms, implies that individuals
working in more specialized industries, concentrated in particular territories
(for example, wineries, fisheries, and coal mining), are less transferable to
other regional labor markets, and therefore are more averse to economic risks
than individuals with the ability to relocate and readjust professionally.
Finally, and critically, the introduction of risk aversion means that the
demand for insurance also increases with income. Taken together, these pre-
dictions yield a pattern of preferences that differs significantly with respect to
the geography of income inequality and helps elucidate the connection between
the geography of risks and preferences over fiscal structures. The introduction
of an insurance dimension in the model brings about significant implications
for the formation of political coalitions in support of alternative institutional
designs.
In contrast to the purely redistributive case, wealthier individuals in regions
with specialized economic activities, have incentives to accept a public insur-
ance system that will shelter them against a potential downturn of their regional
political economy. Elites of highly specialized regions have incentives to pre-
serve their own system of interpersonal redistribution, although it leads to
taxation on their income. As a result, the policy preferences of different income
classes within the region become more similar, which makes the formation of
a political coalition in support of regional interests more likely to emerge.
More importantly, the analysis also implies that this dynamics is orthogonal
to the level of wealth of different regions. An interesting implication of this
result is that with sufficiently high levels of regional risk specificity, the citizens
of a region poorer than the union may forego the income benefits of centralizing
interpersonal redistribution to protect its ability to design an insurance system
better tailored to their specific risk profiles.
7
To illustrate this point,
Figure 2.3
displays the map of preferences for redistribution in a union in which the spe-
cialized region is relatively poorer.
8
Individual's preferences for redistribution
within the specialized region grow closer despite income differences. In politi-
cal terms, this implies that the poor and the rich within the specialized region
prefer a system that complements the functioning of local economies, rather
than a system that plays exclusively to their individual interests, as defined by
their relative position in the income distribution.
In conclusion, an uneven geography of risk reinforces the polarizing effects
of an uneven geography of income inequality. Risk differentials associated with
6
On the relationship between skills, risks, and preferences, see Cusack, Iversen and Rehm (
2006
);
Iversen and Soskice (
2006
); Moene and Wallerstein (
2001
); and Rehm (
2009
).
7
A related analysis of this particular case is provided by Beramendi (
2007
). On the relationship
between income gains and what they call “political risks” associated with centralization, see also
Alesina and Perotti (
1998
); and Perotti (
2001
). For an argument in which centralization works
in the opposite direction, reducing the policy risks among voters, see Cr emer and Palfrey (
1999
).
8
This corresponds to the formal analysis included in Appendix A.
