Monopolistic Supply of Sorting, Inequality and Welfare
35 Pages Posted: 21 Nov 2018 Last revised: 6 May 2021
Date Written: November 21, 2018
Why is an increase in income inequality often accompanied by an increase in socio-economic segregation? And what are the welfare implications of this co-movement? This paper uses a theoretical model to analyze the relationship between income inequality and socio-economic segregation. It shows that rising inequality can trigger sorting according to income, as a monopolist’s proﬁts from oﬀe-ing sorting increase with income inequality. It also examines the re-lationship between sorting and social welfare and shows that proﬁt-maximizing sorting patterns are not necessarily optimal from a welfare perspective. In fact, for a broad ﬁeld of income distributions (monopolist) proﬁts increase with inequality, while at the same time total welfare from sorting decreases.
Keywords: Stratification, Assortative Matching, Group Formation, Income Inequality
JEL Classification: D31, D83, D85, Z13
Suggested Citation: Suggested Citation