Essays on Public Policies and Inequality: Theory and Applications

This thesis examines the impact of redistributive public policies and their design on economic inequality, intergenerational transmission, and citizens' support for redistribution. It consists of three chapters, each focusing on a distinct aspect of public policies. In Chapter 2, I study the relationship between social trust and support for universal basic income (UBI) when its implementation involves public spending cuts in other public goods. For this purpose, I build a political economy model showing that individuals with lower levels of political mistrust are more likely to endorse UBI, reflecting their trust in the government's ability to manage public resources and avoid wasteful retrenchment of other public services. The model also indicates that generalised mistrust, characterised by agents' expectations of their fellow citizens' misbehaviour that can reduce the government's fiscal capacity, does not significantly influence preferences for UBI when it involves a partial retrenchment of other public services. Finally, I conduct an empirical analysis with European regions confirming that political mistrust reduces the support for UBI when its implementation involves a reduction in spending for other public services, while generalised mistrust does not have a statistically significant effect. In Chapter 3, I present a paper coauthored with Nora Strecker on how the structure of income tax systems can affect households' decisions to enrol their children in higher education. This chapter explores the effect of income tax progressivity on the disproportionate use of publicly funded higher education. To this end, we develop a rational choice model, revealing that more progressive tax systems increase poorer households' net fiscal benefit, making their children more likely to attend university. As a consequence, we show that the progressivity of an income tax system can determine a perverse redistribution, in which poorer households subsidise the higher education for richer households. Perverse redistribution can occur when the tax system features increasing marginal tax rates across the income distribution, yet still places a disproportionately heavier financial burden on individuals with lower incomes compared to those with higher incomes. We derive three empirically testable predictions from this model: (i) countries with higher levels of progressivity have higher enrolment rates in higher education; (ii) the parental income gradient in children's higher education attendance is lower in countries with more progressive tax systems; and (iii) countries with more progressive tax systems exhibit a lower perverse redistribution in higher education. We provide empirical validation for our model's predictions across European OECD countries. In Chapter 4, I examine the redistributive effects of educational and social insurance policies in reducing income and educational inequality and fostering intergenerational mobility. The model shows that social insurance policies redistribute income from richer to poorer households, reducing income dispersion, thereby increasing intergenerational mobility and reducing income inequality. Additionally, when assuming complementarity between parental investment and parental human capital in the children's human capital function, social insurance policies reduce human capital inequality and increase intergenerational mobility of human capital through the monetary investment channel. This complementarity between parental investment and parental human capital explains the effect of social insurance policies on the intergenerational transmission of human capital.