Imperfect Competition and Rents in Labor and Product Markets: The Case of the Construction Industry

Kory Kroft, Yao Luo, Magne Mogstad and Bradley Setzler

No 2020-78, Working Papers from Becker Friedman Institute for Research In Economics

Abstract: The primary goal of our paper is to quantify the importance of imperfect competition in the U.S. construction industry by estimating the size of rents earned by American firms and workers. To obtain a comprehensive measure of the total rents and to understand its sources, we take into account that rents may arise both due to markdown of wages and markup of prices. Our analyses combine the universe of U.S. business and worker tax records with newly collected records from U.S. procurement auctions. We first examine how firms respond to a plausibly exogenous shift in product demand through a difference-in-differences design that compares first-time procurement auction winners to the firms that lose, both before and after the auction. Motivated and guided by these estimates, we next develop, identify, and estimate a model where construction firms compete with one another for projects in the product market and for workers in the labor market. The firms may participate both in the private market and in government projects, the latter of which are procured through first-price sealed-bid auctions. We find that American construction firms have significant wage- and price-setting power. This imperfect competition generates a considerable amount of rents, two-thirds of which is captured by the firms. Lastly, we use the estimated model to perform counterfactual analyses which reveal how increases in the market power of firms, in the product market or the labor market, would affect the outcomes and behavior of workers and firms in the construction industry.

Keywords: Imperfect competition; monopsony; market power; rents; rent sharing; auction; procurement (search for similar items in EconPapers)
JEL-codes: D44 J31 J42 L11 (search for similar items in EconPapers)
Pages: 70 pages
Date: 2020
New Economics Papers: this item is included in nep-com and nep-des
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

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https://repec.bfi.uchicago.edu/RePEc/pdfs/BFI_WP_202078.pdf (application/pdf)

Related works:
Working Paper: Imperfect Competition and Rents in Labor and Product Markets: The Case of the Construction Industry (2021)
Working Paper: Imperfect Competition and Rents in Labor and Product Markets: The Case of the Construction Industry (2020)
Working Paper: Imperfect Competition and Rents in Labor and Product Markets: The Case of the Construction Industry (2020)
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