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Monopolistic supply of sorting, inequality, and welfare

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  • Lisa Windsteiger

Abstract

Why is an increase in income inequality often accompanied by an increase in socioeconomic segregation? And what are the welfare implications of this comovement? This paper uses a theoretical model to analyze the relationship between income inequality and socioeconomic segregation. It shows that rising inequality can trigger sorting according to income, as a monopolist's profits from offering sorting increase with income inequality. It also examines the relationship between sorting and social welfare and shows that profit‐maximizing sorting patterns are not necessarily optimal from a welfare perspective. In fact, for a broad field of income distributions (monopolist) profits increase with inequality, while at the same time total welfare from sorting decreases.

Suggested Citation

  • Lisa Windsteiger, 2021. "Monopolistic supply of sorting, inequality, and welfare," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(5), pages 801-821, October.
    • Handle: RePEc:bla:jpbect:v:23:y:2021:i:5:p:801-821
    DOI: 10.1111/jpet.12518
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    Cited by:

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    3. Greg Leo & Jian Lou & Martin Van der Linden & Yevgeniy Vorobeychik & Myrna Wooders, 2021. "Matching soulmates," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(5), pages 822-857, October.
    4. Windsteiger, Lisa, 2022. "The redistributive consequences of segregation and misperceptions," European Economic Review, Elsevier, vol. 144(C).

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