Market Power, Taxes and Inequality

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AbstractThis project studies policy interventions that alleviate the costs of firm market power and income inequality. This research is motivated by the observation that firm profits and concentration in the United States are at their highest levels in history, and income inequality is rising. An important issue is understanding the effects of firm concentration and profitability on wealth and income inequality. Firm market power generates an efficiency-equity trade-off. Production efficiency requires that labor and capital flow towards larger, more profitable firms. This in turn further increases these firms’ profits and largely benefits wealthier individuals, contributing to the wealth inequality. This project examines the effects of this trade-off using granular data and models of market power and inequality.Specifically, this project evaluates the consequences of product market interventions such as sales subsidies and taxes, limits on firm size and markups, anti-trust enforcement, as well as profit and income taxes aimed at reducing the distributional costs of markups. The project employs a dynamic general equilibrium model parameterized to reproduce salient facts about U.S. wealth and income inequality, as well as markups and product market concentration. The research considers a variety of market structures, including monopolistic and oligopolistic competition between heterogeneous private businesses and corporate firms in the product market, as well as monopsony power in the input market.This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.