Risk Markups

Sebastian Di Tella, Cedomir Malgieri and Christopher Tonetti

No 33778, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study optimal policy when heterogeneous markups reflect compensation for uninsurable persistent idiosyncratic risk. The optimal labor tax keep rate equals (1) the aggregate markup times (2) workers' consumption share divided by their Pareto weight. Markups correctly capture the private cost of risk that reduces labor demand, but they are socially inefficient. This requires a subsidy equal to the aggregate markup, as in the traditional market-power perspective. However, even with lump-sum transfers, risk markups lead entrepreneurs to dynamically overaccumulate wealth to self-insure, so impoverished workers oversupply labor. In the long run this effect dominates and it's optimal to tax labor.

JEL-codes: D52 E21 E23 G11 H21 L26 (search for similar items in EconPapers)
Date: 2025-05
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