Macro Seminar - Simon Mongey (Chicago)

Abstract: This paper studies inequality in wealth and income and product market power in general equilibrium. Households face the standard income fluctuations problem and have idiosyncratic preferences over a continuum of goods. Firms choose to enter, produce the varieties and set their price as monopolistic competitors given the endogenous distribution of demand. We show how households' savings motives and incomplete insurance endogenously lead to variation in household-level price elasticities with wealth and income that is consistent with recent empirical evidence. A firm's market power then depends on the distribution of wealth and income of those that chose to consume their variety. In the stationary equilibrium, market power varies across firms as households differentially select into high- and low-price varieties by wealth and income. Under standard preferences, high quality firms sell high marginal cost goods at higher prices to richer households, endogenously face less elastic demand, and set higher markups. We show that such sorting exists in Kilts-Neilsen data. Quantitatively, we show that a one-time fiscal transfer to households leads to a medium run decline in TFP due to two effects (i) poor households trade up to higher marginal cost goods, (ii) these goods' markups increase as poor households' demand becomes less elastic.

Paper

Location: Central House 225

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