Working Paper: NBER ID: w28495
Authors: Jess Fernández-Villaverde; Federico Mandelman; Yang Yu; Francesco Zanetti
Abstract: This paper develops a dynamic general equilibrium model with heterogeneous firms that face search complementarities in the formation of vendor contracts. Search complementarities amplify small differences in productivity among firms. Market concentration fosters monopsony power in the labor market, magnifying profits and further enhancing high-productivity firms' output share. Firms want to get bigger and hire more workers, in stark contrast with the classic monopsony model, where a firm aims to reduce the amount of labor it hires. The combination of search complementarities and monopsony power induces a strong “Matthew effect” that endogenously generates superstar firms out of uniform idiosyncratic productivity distributions. Reductions in search costs increase market concentration, lower the labor income share, and increase wage inequality.
Keywords: market concentration; search complementarities; monopsony power; Matthew effect
JEL Codes: C63; C68; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| search complementarities (D10) | increased market concentration (L11) |
| small productivity differences (D29) | increased market concentration (L11) |
| search complementarities (D10) | emergence of superstar firms (L25) |
| higher productivity (O49) | more intensive search efforts (Y50) |
| more intensive search efforts (Y50) | more vendor contracts (L14) |
| more vendor contracts (L14) | increased output share (F62) |
| monopsony power (J42) | lower wages relative to productivity (J31) |
| monopsony power (J42) | enhanced profits (D33) |
| enhanced profits (D33) | further concentrating market power (D49) |
| higher market concentration (L11) | incentivizes firms to search more aggressively for labor (J23) |
| reductions in search costs (D83) | increased market concentration (L11) |
| reductions in search costs (D83) | increased wage inequality (J31) |