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Monopsony Power and Creative Destruction: Static Loss, Faster Growth

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Listed:
  • Isabella Maassen
  • Filip Mellgren
  • Jonas Overhage

Abstract

Monopsonistic labor markets create misallocation of labor while generating profits. These in turn incentivize firms to innovate, which drives aggregate growth. This paper explores the trade-off between static efficiency and growth by developing a tractable endogenous growth model with heterogeneous firms and upward sloping labor supply curves. We show that monopsony can rationalize the prevalence of unproductive yet innovating firms that would otherwise be crowded out by more productive competitors. Our model calibrated to U.S. data confirms previous findings that imperfectly competitive labor markets distort static efficiency. However, we find that monopsony also leads to higher growth. On balance, we estimate that a 1% narrowing of the markdown increases the present value of output by about 1.08%.

Suggested Citation

  • Isabella Maassen & Filip Mellgren & Jonas Overhage, 2025. "Monopsony Power and Creative Destruction: Static Loss, Faster Growth," CESifo Working Paper Series 11820, CESifo.
    • Handle: RePEc:ces:ceswps:_11820
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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