Income Dispersion and Counter-Cyclical Markups

42 Pages Posted: 3 Nov 2008 Last revised: 29 Dec 2022

See all articles by Chris Edmond

Chris Edmond

New York University

Laura Veldkamp

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

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Date Written: October 2008

Abstract

Recent advances in measuring cyclical changes in the income distribution raise new questions: How might these distributional changes affect the business cycle itself? We show how counter-cyclical income dispersion can generate counter-cyclical markups in the goods market, without any preference shocks or price-setting frictions. In recessions, heterogeneous labor productivity shocks raise income dispersion, lower the price elasticity of demand, and increase imperfectly competitive firms' optimal markups. The calibrated model explains not only many cyclical features of markups, but also cyclical, long-run and cross-state patterns of standard business cycle aggregates.

Suggested Citation

Edmond, Chris and Veldkamp, Laura, Income Dispersion and Counter-Cyclical Markups (October 2008). NBER Working Paper No. w14452, Available at SSRN: https://ssrn.com/abstract=1294127

Chris Edmond (Contact Author)

New York University ( email )

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Laura Veldkamp

Columbia University - Columbia Business School ( email )

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National Bureau of Economic Research (NBER)

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