Market power and inequality : a model of the Brazilian economy

This paper attempts to draw some lines regarding the interplay between market concentration and income inequality in the Brazilian economy. Our goal is to uncover some of the mechanisms by which market power influences macroeconomic aggregates and, consequently, indicators such as the share of the income appropriated by the richest and the Country’s Gini index. For this purpose, we have first conducted an empirical estimation using a PVAR approach with data from Brazilian states. We found that the markup shock is positively related to inequality. Moreover, that result is robust to changes in the model specification or different Cholesky ordering. Second, we built a dynamic general equilibrium model and calibrated it to reproduce the Brazilian economy. The model has three representative agents and heterogeneity in asset market participation and labor supply/skills. Additionally, firms exhibit endogenous oligopolistic and oligopsonistic (in the labor market) behavior. In response to unexpected markup shocks, the model showed a regressive dynamic, transferring income from the bottom to the top of the distribution. Nevertheless, its effects on economic growth may be positive in the short term, due to the increased investment in creating new companies. The disturbances in the TFP reduce inequality on impact, which is due to the countercyclical behavior of the markup. Instead, when we allow the TFP shock to be correlated with the markup, this effect is reversed, with the largest share of income being appropriated by the wealthiest. Finally, it is noteworthy that the labor supply elasticities partially determine the behavior of income distribution between poor and middle-class households.