Price-Cost Margins and Rent Sharing: Evidence from a Panel of French Manufacturing Firms

This paper presents a model for estimating both the magnitude of price-cost margins and the extent of rent sharing. The model generalizes Robert Hall's model, relating the conventional measure of total factor productivity (the "Solow residual") to the degree of imperfect competition in product markets, by also allowing for the possibility of imperfect labor markets. It does so by assuming that the firm wages and level of employment are jointly determined according to an efficient bargaining scheme between the firm and its workers. One attractive aspect of Hall's framework is that it does not require a measure of the user cost of capital to assess the magnitude of markups, in contrast to more conventional analyses. Similarly, another interesting feature of our extended framework is that it does not require a measure of the alternative external wage to estimate the degree of workers' bargaining power, contrary to most studies on rent sharing. Our model is estimated on a panel of French manufacturing firms using the Generalized Method of Moments (GMM). We find that the lack of explicit consideration of labor market imperfection results in a large underestimation of the firm true markup, corresponding to the omission of the part of the firm rent captured by workers. Our estimate of average rent sharing is about 0.6, while our estimate of average price-cost margins is of an order of magnitude of 1.4, to be compared to 1.1 only, if rent sharing is ignored.