Digitized by the Internet Archive in 2011 with Funding from Boston Library Consortium Iviember Libraries Us versus Europe* *this Project Was Initiated by a Lively Discussion We Had with February 2002. for Helpful Discussions and Comments, We Thank

Different beliefs about how fair social competition is and what determines income inequality, influence the redistributive policy chosen democratically in a society. But the composition of income in the first place depends on equilibrium tax policies. If a society believes that individual effort determines income, and that all have a right to enjoy the fruits of their effort, it will chose low redistribution and low taxes. In equilibrium, eff'ort will be high, the role of luck limited, market outcomes will be quite fair, and social beliefs will be self-fulfilled. If instead a society believes that luck, birth, connections and/or corruption determine wealth, it will tax a lot, thus distorting allocations and making these beliefs self-sustained as well. We show how this interaction between social beliefs and welfare policies may lead to multiple equilibria or multiple steady states. We argue that this model can contribute to explain US vis a vis continental European perceptions about income inequality and choices of redistributive policies. *This project was initiated by a lively discussion we had with Olivier Blanchard and Xavier Gabaix in February 2002. For helpful discussions and comments, we thank Daron Acemoglu, Robert Barro, Roland Benabou, Olivier Blanchard, Peter Diamond, Glenn Ellison, Ed Glaeser, Jhon Gruber, Eliana La Ferrara, Roberto Perotti, Thomas Philippon, Jim Poterba, Andrei Shleifer, Guido Tabellini, Ivan Werning, and seminar participants at MIT, Warwick, Trinity College, Dublin, ECB, and IGIER Bocconi. Arnaud Devleeschauer provided excellent research assistance. Email: cialesina@har\'ard.edu, [email protected]. A. Alesina and G.M. Angeletos