Monopsony Power and Creative Destruction: Static Loss, Faster Growth

Isabella Maassen, Filip Mellgren and Jonas Overhage

No 11820, CESifo Working Paper Series from CESifo

Abstract: Monopsonistic labor markets create misallocation of labor while generating profits. These in turn incentivize firms to innovate, which drives aggregate growth. This paper explores the trade-off between static efficiency and growth by developing a tractable endogenous growth model with heterogeneous firms and upward sloping labor supply curves. We show that monopsony can rationalize the prevalence of unproductive yet innovating firms that would otherwise be crowded out by more productive competitors. Our model calibrated to U.S. data confirms previous findings that imperfectly competitive labor markets distort static efficiency. However, we find that monopsony also leads to higher growth. On balance, we estimate that a 1% narrowing of the markdown increases the present value of output by about 1.08%.

Keywords: monopsony power; creative destruction; productivity; innovation; economic growth. (search for similar items in EconPapers)
JEL-codes: E24 J42 O31 O47 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_11820

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