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MARKET POWER AND THE AGGREGATE SAVING RATE
Published online by Cambridge University Press: 15 February 2018
Abstract
Can increasing market power cause a decrease in the aggregate savings? We answer this question by using a heterogeneous agents model that features both idiosyncratic labor and capital income risk. Under complete markets, the saving rate does not depend on the degree of market power, but when markets are incomplete, higher markups substantially reduce the aggregate saving rate. This is due to endogenous changes in the distribution of income and wealth. A calibration of the model using the observed changes in market power in the United States since the 1970s closely matches the decline in the US saving rate. Furthermore, when market power increases, the model generates distributional changes that are consistent with the data.
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Footnotes
We thank seminar participants at Bates College, St. Francis Xavier University, Southern Methodist University, and the MED study group at Dalhousie for comments and suggestions. İşcan thanks Universidad Carlos III de Madrid for its hospitality during the early stages of this research. This research was not externally funded. The authors declare no competing financial interests.
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