Income Dispersion and Counter-Cyclical Markups

Abstract:     
We construct a model of counter-cyclical markups based on cyclical variation inthe dispersion of income across agents. The model is neoclassical in most respects, with monopolistically competitive firms facing a distribution of buyers that changes through time. Income dispersion is high during recessions, which reduces the price elasticity of demand and increases markups applied by firms. Using recent estimates ofcounter-cyclical income dispersion, we calibrate the model and show that it generates realistic markups as well as other salient features of business cycles.

Number of Pages in PDF File: 34

Keywords: business cycles, counter-cyclical markups, income dispersion

working papers series