Polarization and Income Inequality: A Dynamic Model of Unequal Democracy

Recent empirical work has demonstrated a strong correlation between growing income inequality and polarization of political elites in the United States. To analyze this correlation, we provide a dynamic model of party competition in which two policy motivated parties compete both for votes and donations in order to win elections. We assume that parties know the distribution of voters and donors but are unsure of the relative importance of each group. As a consequence, parties take divergent (polarized) positions and election outcomes are stochastic. We also assume that moving policy outcomes to the right increases income inequality and shifts the distribution of donor ideal points to the right. We show that along the equilibrium path, polarization and income inequality are positively correlated. Increased polarization results more from the policy changes of the party favoring policies to the right rather than the party favoring the left. Finally, a victory by the right favoring party in any election implies more polarization in the future.