Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/232494 
Year of Publication: 
2021
Series/Report no.: 
CESifo Working Paper No. 8897
Publisher: 
Center for Economic Studies and Ifo Institute (CESifo), Munich
Abstract: 
This paper develops a dynamic general equilibrium model with heterogeneous firms that face search complementarities in the formation of vendor contracts. Search complementarities amplify small differences in productivity among firms. Market concentration fosters monopsony power in the labor market, magnifying profits and further enhancing high-productivity firms’ output share. Firms want to get bigger and hire more workers, in stark contrast with the classic monopsony model, where a firm aims to reduce the amount of labor it hires. The combination of search complementarities and monopsony power induces a strong “Matthew effect” that endogenously generates superstar firms out of uniform idiosyncratic productivity distributions. Reductions in search costs increase market concentration, lower the labor income share, and increase wage inequality.
Subjects: 
market concentration
superstar firms
search complementarities
monopsony power in the labor market
JEL: 
C63
C68
E32
E37
E44
G12
Document Type: 
Working Paper
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