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    The “Matthew Effect” and market concentration: search complementarities and monopsony power

    Fernandez-Villaverde, J. and Mandelman, F. and Yu, Y. and Zanetti, F. (2021) The “Matthew Effect” and market concentration: search complementarities and monopsony power. Working Paper. Birkbeck Centre for Applied Macroeconomics, London, UK.

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    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 highproductivity 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.

    Metadata

    Item Type: Monograph (Working Paper)
    Additional Information: BCAM Working Paper #2103. ISSN: 1745-8587
    Keyword(s) / Subject(s): Market concentration, superstar firms, search complementarities, monopsony power in the labor market.
    School: School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Research Centres and Institutes: Applied Macroeconomics, Birkbeck Centre for
    Depositing User: Isobel Edwards
    Date Deposited: 29 Mar 2021 15:35
    Last Modified: 17 Jun 2021 18:05
    URI: https://eprints.bbk.ac.uk/id/eprint/43092

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