Market Power, Inequality, and Financial Instability

60 Pages Posted: 27 Dec 2022

See all articles by Isabel Cairo

Isabel Cairo

Board of Governors of the Federal Reserve System

Jae Sim

Board of Governors of the Federal Reserve System

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Abstract

Over the last four decades, the U.S. economy has experienced a few secular trends: declining labor share, increasing profit share, widening income and wealth inequalities, rising household sector leverage and associated financial instability, manifested in an increase in the probability of financial crises. This paper provides a unifying framework for explaining these trends based on a rise in firm market power in both product and labor markets. We develop a general equilibrium model and show that the rise in firm market power over the last few decades can generate all of these secular trends.

Keywords: E21, E25, G01

Suggested Citation

Cairo, Isabel and Sim, Jae W., Market Power, Inequality, and Financial Instability. Available at SSRN: https://ssrn.com/abstract=4313125 or http://dx.doi.org/10.2139/ssrn.4313125

Isabel Cairo (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Jae W. Sim

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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