NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Markups and Inequality

Corina Boar, Virgiliu Midrigan

NBER Working Paper No. 25952
Issued in June 2019
NBER Program(s):Economic Fluctuations and Growth Program, Industrial Organization Program, The Monetary Economics Program, Productivity, Innovation, and Entrepreneurship Program

We study the aggregate and distributional impact of product market interventions and profit taxes using a model of firm dynamics, credit constraints and incomplete markets. A key ingredient of our model is that markups are endogenous so that the markup a producer charges depends on the amount of competition it faces. We show that size-dependent subsidies that remove the distortions due to markup dispersion lead to sizable welfare gains and reduce inequality, even though they increase firm concentration and long-run misallocation. In contrast, policies that reduce concentration lead to large output, TFP and welfare losses and increase inequality. A tax on profits greatly depresses the incentives to create new firms, reducing labor demand, after-tax wages and welfare.

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Document Object Identifier (DOI): 10.3386/w25952

 
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