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Increasing Returns, Imperfect Competition and Factor Prices

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  • Paolo Epifani
  • Gino Gancia

Abstract

We show how, in general equilibrium models featuring increasing returns, imperfect competition and endogenous markups, changes in the scale of economic activity affect income distribution across factors. Whenever final goods are gross-substitutes (gross- complements), a scale expansion raises (lowers) the relative reward of the scarce factor or the factor used intensively in the sector characterized by a higher degree of product differentiation and higher fixed costs. Under very reasonable hypothesis, our theory suggests that scale is skill-biased. This result provides a microfoundation for the secular increase in the relative demand for skilled labor. Moreover, it constitutes an important link among major explanations for the rise in wage inequality: skill-biased technical change, capital-skill complementarities and international trade. We provide new evidence on the mechanism underlying the skill bias of scale.

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  • Paolo Epifani & Gino Gancia, 2004. "Increasing Returns, Imperfect Competition and Factor Prices," Working Papers 210, Barcelona Graduate School of Economics.
  • Handle: RePEc:bge:wpaper:210
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    References listed on IDEAS

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    Cited by:

    1. Breinlich, Holger & Cuñat, Alejandro, 2013. "Geography, non-homotheticity, and industrialization: A quantitative analysis," Journal of Development Economics, Elsevier, vol. 103(C), pages 133-153.
    2. Pablo Fajgelbaum & Gene M. Grossman & Elhanan Helpman, 2011. "Income Distribution, Product Quality, and International Trade," Journal of Political Economy, University of Chicago Press, vol. 119(4), pages 721-765.
    3. Rosario Crinò, 2012. "Service Offshoring and the Skill Composition of Labour Demand," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 74(1), pages 20-57, February.
    4. Rosario Crinò, "undated". "Service Offshoring and White-Collar Employment," Working Papers 391, Barcelona Graduate School of Economics.
    5. Ariel Burstein & Jonathan Vogel, 2011. "Factor Prices and International Trade: A Unifying Perspective," NBER Working Papers 16904, National Bureau of Economic Research, Inc.
    6. Daron Djerdjian, 2010. "Economics versus politics in trade policy," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 146(2), pages 223-240, June.
    7. Dinopoulos, Elias & Syropoulos, Constantinos & Xu, Bin & Yotov, Yoto V., 2011. "Intraindustry trade and the skill premium: Theory and evidence," Journal of International Economics, Elsevier, vol. 84(1), pages 15-25, May.
    8. Rosario Crinò, 2007. "Offshoring, Multinationals and Labor Market: A Review of the Empirical Literature," KITeS Working Papers 196, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy, revised Jan 2007.
    9. Auer, Raphael A., 2015. "Human capital and the dynamic effects of trade," Journal of Development Economics, Elsevier, vol. 117(C), pages 107-118.
    10. Epifani, Paolo & Gancia, Gino, 2011. "Trade, markup heterogeneity and misallocations," Journal of International Economics, Elsevier, vol. 83(1), pages 1-13, January.
    11. Gino Gancia, 2012. "Globalization, technology and inequality," Economics Working Papers 1363, Department of Economics and Business, Universitat Pompeu Fabra, revised Nov 2012.
    12. Crinò, Rosario, 2012. "Imported inputs and skill upgrading," Labour Economics, Elsevier, vol. 19(6), pages 957-969.
    13. Crinò, Rosario & Epifani, Paolo, 2014. "The Skill Bias of the US Trade Deficit," CEPR Discussion Papers 9899, C.E.P.R. Discussion Papers.
    14. Ariel Burstein & Jonathan Vogel, 2010. "Globalization, Technology, and the Skill Premium: A Quantitative Analysis," NBER Working Papers 16459, National Bureau of Economic Research, Inc.
    15. Nils Herger, 2015. "An uncovered interest parity condition that worked - The continental investment demand for London bills of exchange during the gold standard (1880 -1914)," Working Papers 15.04, Swiss National Bank, Study Center Gerzensee.
    16. Paula Bustos, 2005. "The impact of trade liberalization on skill upgrading. Evidence from Argentina," Economics Working Papers 1189, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2011.
    17. Maman Setiawan & Grigorios Emvalomatis & Alfons Oude Lansink, 2013. "Structure, conduct, and performance: evidence from the Indonesian food and beverages industry," Empirical Economics, Springer, vol. 45(3), pages 1149-1165, December.
    18. Kiminori Matsuyama, 2007. "Beyond Icebergs: Towards a Theory of Biased Globalization," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 237-253.
    19. Paolo Epifani & Rosario Crinò, 2013. "Trade Imbalances and Wage Inequality," 2013 Meeting Papers 383, Society for Economic Dynamics.
    20. Wen-Shuenn Deng & Yi-Chen Lin, 2013. "Parameter heterogeneity in the foreign direct investment-income inequality relationship: a semiparametric regression analysis," Empirical Economics, Springer, vol. 45(2), pages 845-872, October.
    21. Nico Voigtlaender, 2009. "Many Sectors Meet More Skills: Intersectoral Linkages and the Skill Bias of Technology," 2009 Meeting Papers 1136, Society for Economic Dynamics.

    More about this item

    Keywords

    Endogenous markups; pro-competitive effect; income distribution; trade models with imperfect competition; wage inequality;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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