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Competition and Inequality

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  • Andrea Colciago
  • Rajssa Mechelli

Abstract

This paper links the debate on the decrease in competitiveness and business dynamism with that on rising inequality. We build a framework with entry, imperfect competition, heterogeneous households, and incomplete markets. Recent trends in markups, factors' share, and business dynamism are explained through an increase in barriers to entry for new firms, which restrict competition. Those trends account for 11% to 22% of the increase in income inequality observed between 1989 and 2007 and for 10% of the increase in wealth inequality. Just 16% of the population experiences a welfare gain during the transition from a high to a low competition environment. These are either the wealthy, or agents with low productivity relative to their asset holdings.

Suggested Citation

  • Andrea Colciago & Rajssa Mechelli, 2020. "Competition and Inequality," DNB Working Papers 689, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:689
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    References listed on IDEAS

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    More about this item

    Keywords

    inequality; entry; oligopoly; markups; incomplete markets;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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