Monopsony Makes Firms not only Small but also Unproductive: Why East Germany has not Converged

Rüdiger Bachmann (rbachman@nd.edu), Christian Bayer, Heiko Stüber (heiko.stueber@iab.de) and Felix Wellschmied
Additional contact information
Rüdiger Bachmann: University of Notre Dame
Heiko Stüber: Institute for Employment Research

No 328, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany

Abstract: When employers face a trade-off between being large and paying low wages—and in this sense have monopsony power—some productive employers decide to acquire few customers, forgo sales, and remain small. These decisions have adverse consequences for aggregate labor productivity. Using high-quality administrative data from Germany, we document that East German plants (compared to West German ones) face steeper size-wage curves, invest less into marketing, remain smaller, and are less productive. A model with labor market monopsony, product market power, and customer acquisition matching these features of the data predicts ten percent lower aggregate labor productivity in East Germany.

Keywords: Aggregate productivity; plant heterogeneity; collective bargaining; monopsony power; size-wage curve; business networks; customer capital; size distortions (search for similar items in EconPapers)
JEL-codes: E20 E23 E24 J20 J42 J50 (search for similar items in EconPapers)
Pages: 86 pages
Date: 2024-07
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https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_328_2024.pdf Second version, 2025 (application/pdf)

Related works:
Working Paper: Monopsony Makes Firms Not Only Small but Also Unproductive: Why East Germany Has Not Converged (2023)
Working Paper: Monopsony Makes Firms Not Only Small but Also Unproductive: Why East-Germany Has Not Converged (2022)
Working Paper: Monopsony Makes Firms not only Small but also Unproductive: Why East Germany has not Converged (2022)
Working Paper: Monopsony Makes Firms Not Only Small but Also Unproductive: Why East Germany Has Not Converged (2022)
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