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Thorstein Veblen, Joan Robinson, and George Stigler (probably) never met: Social Preferences, Monopsony, and Government Intervention

Laszlo Goerke () and Michael Neugart ()

No 202001, IAAEU Discussion Papers from Institute of Labour Law and Industrial Relations in the European Union (IAAEU)

Abstract: Wages and employment are too low in a monopsony. Furthermore, a minimum wage or a subsidy may raise employment up to its first-best level. First, we analyze whether these important predictions still hold if workers compare their income to that of a reference group. Second, we show that the undistorted, competitive outcome may no longer constitute the benchmark for welfare comparisons. Third, we derive a condition which guarantees that the monopsony distortion is exactly balanced by the impact of social comparisons. Finally, we show how wage restrictions and subsidies or taxes can be used to ensure this condition both for a welfarist and a paternalistic welfare objective.

Keywords: social preferences; government intervention; minimum wage; monopsony; taxation; wage regulation (search for similar items in EconPapers)
JEL-codes: D10 H21 J30 J42 (search for similar items in EconPapers)
Date: 2020-01
New Economics Papers: this item is included in nep-lma and nep-pke
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