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Monopoly rights can reduce income big time

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Author Info

  • Herrendorf, Berthold

    (Universidad Carlos III de Madrid, Departamento de Economía)

  • Teixeira, Arilton

    ()
    (Ibmec, Department of Economics)

Abstract

We ask which part of the observed cross-country differences in the level of per capita income can be accounted for by monopoly rights in the labour market. We answer this question in a calibrated growth model with two final goods sectors. The novel feature being that monopoly rights in the capital-producing sector shield insiders from competition by outsiders and permit coalitions of insiders to choose inefficient technologies or working practices. We find that monopoly rights can lead to quantitatively much larger reductions in the level of per capita income than previously demonstrated. This comes about because they do not only reduce TFP in capital-producing sector but also increase the relative price of capital. This reduces the capital-labour ratio in the whole economy. The implied predictions about the price of capital goods relative to consumption goods and the investment share in output are quantitatively consistent with the cross-country facts.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0407.pdf
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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 7/2004.

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Length: 41 pages
Date of creation: 14 Dec 2004
Date of revision:
Handle: RePEc:hhs:bofrdp:2004_007

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Related research

Keywords: cross-country income differences; cross-country productivity differences; monopoly rights; relative price of capital; capital accumulation;

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References

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