The Rodney L. White Center for Financial Research Trading and Voting

The Rodney L. White Center for Financial Research is one of the oldest financial research centers in the country. It was founded in 1969 through a grant from Oppenheimer & Company in honor of its late partner, Rodney L. White. The Center receives support from its endowment and from annual contributions from its Members. The Center sponsors a wide range of financial research. It publishes a working paper series and a reprint series. It holds an annual seminar, which for the last several years has focused on household financial decision making. The Members of the Center gain the opportunity to participate in innovative research to break new ground in the field of finance. Through their membership, they also gain access to the Wharton School's faculty and enjoy other special benefits.les and participants in the University of Pennsylvania's Political Economy seminar for helpful advice and comments. Abstract Trading and Voting The political choice between candidates with di®erent redistribution policies plays out very di®er-ently in a complete ¯nancial market. When voters have the opportunity to trade election-contingent securities, we ¯nd that 1) wealth considerations have no e®ect on voting, so the interaction between candidates' redistribution policies and the distribution of wealth has no e®ect on who wins, 2) an election in which a candidate promises wealth redistribution results in redistribution of wealth, and the redistribution is the same regardless of who wins, and 3) if one candidate prefers some amount of redistribution and the other does not, the candidate who prefers redistribution will propose more redistribution than the amount he prefers. (JEL G33, D12, G21) Elections assign the right to design tax policies, so to consumers they represent uncertainty over future wealth. An election pitting a candidate who proposes to redistribute wealth against another who does not indicates one future state of the world where the wealthy lose wealth to the poor, and another future state where they don't. One implication of this uncertainty is for the election's outcome: other things equal, a voter chooses the candidate delivering him more wealth, so the interaction of the tax policies with the wealth distribution decides who wins. The literature has explored this implication extensively (see, e. and Lizzeri and Persico (2000)) including multi-period models focusing on accumulating debt (see, We are concerned here with a di®erent implication, which turns out to have strong implications for the ¯rst: consumers would respond to the wealth uncertainty …