Labor-Market Power, Deadweight Loss, and Technology Adoption
Buyer power can induce deadweight loss, but it can also incentivize buyers’ technology adoption by reducing investment holdup. In this paper, I construct a structural model that incorporates these two opposing forces, and use it to quantify the net welfare effects of employers’ market power over their workers. Applying the model to the late-19th-century Illinois coal mining industry, a textbook monopsony example that experienced a large technological shock due to the invention of mechanical cutting machines, I find that an increase in employer power would have induced substantially higher mechanization rates. Assuming exogenous capital investment leads to overestimating the consumer and labor welfare losses from employer power by 13% and 7%.
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