Increasing Returns, Imperfect Competition and Factor Prices

Paolo Epifani () and Gino Gancia

No 210, Working Papers from Barcelona School of Economics

Abstract: We show how, in general equilibrium models featuring increasing returns, imperfect competition and endogenous markups, changes in the scale of economic activity affect income distribution across factors. Whenever final goods are gross-substitutes (gross- complements), a scale expansion raises (lowers) the relative reward of the scarce factor or the factor used intensively in the sector characterized by a higher degree of product differentiation and higher fixed costs. Under very reasonable hypothesis, our theory suggests that scale is skill-biased. This result provides a microfoundation for the secular increase in the relative demand for skilled labor. Moreover, it constitutes an important link among major explanations for the rise in wage inequality: skill-biased technical change, capital-skill complementarities and international trade. We provide new evidence on the mechanism underlying the skill bias of scale.

Keywords: income distribution; wage inequality; Endogenous markups; pro-competitive effect; trade models with imperfect competition (search for similar items in EconPapers)
JEL-codes: F12 F16 (search for similar items in EconPapers)
Date: 2015-09
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Increasing Returns, Imperfect Competition, and Factor Prices (2006)
Working Paper: Increasing returns, imperfect competition and factor prices (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:210

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