Monopoly rights can reduce income big time

We ask which part of the observed cross-country differences in the level of per capita income can be accounted for by monopoly rights in the labour market. We answer this question in a calibrated growth model with two final goods sectors. The novel feature being that monopoly rights in the capital-producing sector shield insiders from competition by outsiders and permit coalitions of insiders to choose inefficient technologies or working practices. We find that monopoly rights can lead to quantitatively much larger reductions in the level of per capita income than previously demonstrated. This comes about because they do not only reduce TFP in capital-producing sector but also increase the relative price of capital. This reduces the capital-labour ratio in the whole economy. The implied predictions about the price of capital goods relative to consumption goods and the investment share in output are quantitatively consistent with the cross-country facts.

Introduction: There are large cross-country differences in the level of per captia income. For example, the penn world Table of 1996 report taht the average per capita income of the richest ten percentile of countries is about thirty times that of the poorest ten percentile.

Author: Berthold Herrendorf,Arilton Teixeira

Source: Research Discussion Papers, Bank of Finland

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