Increasing returns, imperfect competition and factor prices

Paolo Epifani () and Gino Gancia

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

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: Endogenous Markups; Pro-competitive E¤ect; Income Distribution; Trade Models with Imperfect Competition; Wage Inequality (search for similar items in EconPapers)
JEL-codes: F12 F16 (search for similar items in EconPapers)
Date: 2004-07, Revised 2005-10
New Economics Papers: this item is included in nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Working Paper: Increasing Returns, Imperfect Competition and Factor Prices (2015)
Journal Article: Increasing Returns, Imperfect Competition, and Factor Prices (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:953

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