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Imperfect Competition and Rents in Labor and Product Markets: The Case of the Construction Industry

Kory Kroft, Yao Luo, Magne Mogstad, Bradley Setzler

NBER Working Paper No. 27325
Issued in June 2020
NBER Program(s):Industrial Organization, Labor Studies, Public Economics

We quantify the importance of imperfect competition in the U.S. construction industry by estimating the size of rents earned by American firms and workers. To obtain a comprehensive measure of the total rents and to understand its sources, we take into account that rents may arise both due to markdown of wages and markup of prices. Our analyses combine the universe of U.S. business and worker tax records with newly collected records from U.S. procurement auctions. We first examine how firms respond to a plausibly exogenous shift in product demand through a difference-in-differences design that compares first-time procurement auction winners to the firms that lose, both before and after the auction. Motivated and guided by these estimates, we next develop, identify, and estimate a model where construction firms compete with one another for projects in the product market and for workers in the labor market. We find that American construction firms have significant wage- and price-setting power. This imperfect competition generates a considerable amount of rents, two-thirds of which is captured by the firms.

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Document Object Identifier (DOI): 10.3386/w27325

 
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