Xhani, Dajana; (2022) An Examination of Imperfect Competition in Macroeconomics. Doctoral thesis (Ph.D), UCL (University College London).

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Abstract

This thesis investigates ways in which more general notions of market power can be incorporated in macroeconomics and can be leveraged together with large firm-level datasets to study misallocation and policy interventions in new ways. The first chapter studies the rise of markups in the US, with the objective to distinguish between the pessimistic view that markups have risen due to higher barriers to entry versus a more optimistic view that higher markups are the result of higher productivity. I answer this question in an oligopolistic framework, with multi-product firms that follow exogenous processes of productivity innovation and expansion into new markets. Matching the model to Compustat data for Manufacturing firms, I find that the increase in markups is driven by an increased dispersion in productivities with the expansion rate into new markets having increased. In the model, these forces are what generates a higher dispersion in markups driven by the right-tail of the distribution, with almost no change at the median or below. The second chapter studies misallocation in the generalized monopolistic competition model with heterogenous firms. In particular, it offers a new welfare statistic that is derived from mapping firm-level elasticities into an aggregate effect. This allows the researcher to answer welfare question without making any parametric assumptions on the demand schedules and therefore offers a way to relax the functional form restrictions made in previous work on misallocation. I show that the total welfare change can be decomposed into three channels: (i) the direct effect of the shock, (ii) a selection effect that arises as the least productive firm in equilibrium changes and, (iii) a reallocation effect as production shifts across firms. I also pursue some extension of the baseline version of the framework and confirm that the welfare formula remains tractable and intuitive. The third chapter examines whether nonlinear firm taxes can have sizable welfare effects in light of the high markup dispersion (and thus potentially misallocation) that has already been documented in the literature. To make the sufficient statistic derived in the previous chapter operational, one needs estimates of both markups and output responsiveness at the firm-level. I propose a novel way to non-parametrically recover the responsiveness parameter by exploiting the monopolistic setup and some commonly used assumptions on the production side. I apply this estimator, together with the standard one on markups to a large dataset of UK firms. I conclude that it is welfare improving to subsidise small firms at the expense of large ones and moreover, even a simple revenue-neutral two-tier sales tax can deliver substantial gains.

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