The Social Contracts with Endogenous Sentiments

• Authors: Joan-Maria Esteban.
• BSE Working Paper: 1171 | September 15
• Keywords: Endogenous altruism , income taxation , social contract
• JEL codes: D50, D64, D72, D31, E62
• Endogenous altruism
• income taxation
• social contract

We present a model in which an individual’s sentiments toward others are determined endogenously on the basis of how they perform relative to the societal average. This, in turn, affects the individual’s own behavior and hence other agent’s sentiments toward her. We focus on stationary patterns of utility interdependence in a production economy with redistributive taxation. There are two types of stationary equilibria: one in which all agents conform to the societal norm, and a second involving social stratification on the basis of productivity into two or three groups. We show that both types of social contract can be sustained as a political equilibrium. In the cohesive equilibrium with high redistribution, sentiments will be such that a majority of individuals will support high taxation, while in the clustered society with low redistribution the majority of voters will be in favor of keeping taxes low.