Working Paper: CEPR ID: DP16097
Authors: Jan Eeckhout; Jan De Loecker; Simon Mongey
Abstract: We propose a general equilibrium model with oligopolistic output markets where two channels can cause a change in market power: (i) technology, via changes to productivity shocks and the cost of en- try, (ii) market structure, via changes to the number of potential competitors. First, we disentangle these narratives by matching data on markups, labor reallocation and costs, finding that both channels are necessary to account for the data. Second, we show that changes in technology and market structure yield positive welfare effects through reallocation and selection, but off-setting negative effects from dead- weight loss and overhead. Overall, welfare is 9 percent lower in 2016 than in 1980. Third, the changes we identify explain and decompose cross-sectional patterns in declining business dynamism, declining equilibrium wages and labor force participation via reallocation toward larger, more productive firms.
Keywords: business dynamism; market power in the aggregate economy; technological change; market structure; reallocation; endogenous markups; wage stagnation; labor share; passthrough
JEL Codes: C6; D4; D5; L1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Technological change (O33) | Market power (L11) |
| Market structure changes (D49) | Market power (L11) |
| Technological change (O33) | Welfare (I38) |
| Market power (L11) | Welfare (I38) |
| Technological change (O33) | Output gains (C67) |
| Increased markups (D49) | Welfare (I38) |
| Incomplete passthrough of productivity shocks (O49) | Labor force participation (J21) |
| Incomplete passthrough of productivity shocks (O49) | Equilibrium wages (J31) |
| Increased market power (D43) | Employment reallocation rates (J63) |