Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/244307 
Year of Publication: 
2021
Series/Report no.: 
Working Paper No. 2021-4
Publisher: 
Federal Reserve Bank of Atlanta, Atlanta, GA
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 the output share of high-productivity firms. The combination of search complementarities and monopsony power induce 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. The model also transforms short-lived negative aggregate shocks into persistent recessions that heighten market concentration.
Subjects: 
market concentration
superstar firms
search complementarities
monopsony power in the labor market
JEL: 
C63
C68
E32
E37
E44
G12
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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