Monopolistic Supply of Sorting, Inequality and Welfare

Lisa Windsteiger

Working Papers from Max Planck Institute for Tax Law and Public Finance

Abstract: Why is an increase in income inequality often accompanied by an increase in socio-economic segregation? And what are the welfare implications of this co-movement? This paper uses a theoretical model to analyze the relationship between income inequality and socio-economic segregation. It shows that rising inequality can trigger sorting according to income, as a monopolist´s proï¬ ts from offering sorting increase with income inequality. It also examines the relationship between sorting and social welfare and shows that proï¬ t maximizing sorting patterns are not necessarily optimal from a welfare perspective. In fact, for a broad ï¬ eld of income distributions (monopolist) proï¬ ts increase with inequality, while at the same time total welfare from sorting decreases.

Keywords: Stratification; Assortative Matching; Group Formation; Income Inequality (search for similar items in EconPapers)
JEL-codes: D31 D83 Z13 Z18 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2018-11
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Persistent link: https://EconPapers.repec.org/RePEc:mpi:wpaper:tax-mpg-rps-2018-15

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