Research Discussion Papers, Bank of Finland
No 7/2004:
Monopoly rights can reduce income big time
Berthold Herrendorf and Arilton Teixeira ()
Abstract: We ask which part of the observed cross-country
differences in the level of per capita income can be accounted for by
monopoly rights in the labour market. We answer this question in a
calibrated growth model with two final goods sectors. The novel feature
being that monopoly rights in the capital-producing sector shield insiders
from competition by outsiders and permit coalitions of insiders to choose
inefficient technologies or working practices. We find that monopoly rights
can lead to quantitatively much larger reductions in the level of per
capita income than previously demonstrated. This comes about because they
do not only reduce TFP in capital-producing sector but also increase the
relative price of capital. This reduces the capital-labour ratio in the
whole economy. The implied predictions about the price of capital goods
relative to consumption goods and the investment share in output are
quantitatively consistent with the cross-country facts.
Keywords: cross-country income differences; cross-country productivity differences; monopoly rights; relative price of capital; capital accumulation; (follow links to similar papers)
JEL-Codes: E00; (follow links to similar papers)
41 pages, December 14, 2004
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