Working Paper: NBER ID: w28761
Authors: Jan De Loecker; Jan Eeckhout; Simon Mongey
Abstract: We propose a general equilibrium economy with oligopolistic output markets in which two channels can cause a change in market power: (i) technology, via changes to productivity shocks and the cost of entry, (ii) market structure, via changes to the number of potential competitors. First, we disentangle these narratives by matching time-series on markups, labor reallocation and costs between 1980 and 2016, finding that both channels are necessary to account for the data. Second, we show that changes in technology and market structure over this period yielded positive welfare effects from reallocation and selection, but off-setting negative effects from deadweight loss and overhead. Overall, welfare is 9 percent lower in 2016 than in 1980. Third, the changes we identify replicate cross-sectional patterns in declining business dynamism, declining equilibrium wages and labor force participation, and sales reallocation toward larger, more productive firms.
Keywords: market power; business dynamism; welfare; labor market; general equilibrium
JEL Codes: E0; L1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| technological changes (O33) | market power (L11) |
| market structure changes (D49) | market power (L11) |
| technological changes (O33) | welfare (I38) |
| market power (L11) | welfare (I38) |
| technological changes (O33) | labor reallocation (J69) |
| market power + labor market dynamics (J42) | welfare (I38) |