Andrea Colciago, De Nederlandsche Bank and University of Milano-Bicocca
This paper builds a framework with strategic interactions between an endogenous number of producers that matches the distributions of income and wealth in the US. It explains recent trends in markups, factors’s share, and business dynamism through an increase in entry costs for new firms, which limits competition. Through those trends, it accounts for 25% to 50% of the increase in income inequality observed between 1989 and 2007 and for 30% of the increase in wealth inequality. It finds that just 3% of the population experiences a welfare gain during the transition from a high to a low competition environment.
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