Market Power, Growth, and Wealth Inequality

In recent decades, the U.S. economy has experienced a rise in market power, a slowdown in productivity growth, and a pronounced increase in wealth concentration. We develop a theory in which a decline in competition jointly generates these developments. Reduced competition raises markups and firm valuations while weakening knowledge spillovers and slowing growth. Higher firm valuations put upward pressure on the return gap, (r-g), while slower growth allows the real interest rate to fall. The wider return gap changes saving behavior across the wealth distribution, increasing wealth concentration. To study this mechanism, we combine an endogenous-growth model with heterogeneous households and incomplete markets. Quantitatively, the model accounts for substantial parts of the observed rise in markups and wealth concentration and the decline in productivity growth, while also generating a fall in the real interest rate. Changes in saving behavior among the top 1 percent explain almost the entire rise in concentration. Finally, higher market power lowers welfare for most households while benefiting only the very top of the wealth distribution.