Monopolistic Supply of Sorting, Inequality and Welfare

35 Pages Posted: 21 Nov 2018 Last revised: 6 May 2021

See all articles by Lisa Windsteiger

Lisa Windsteiger

Max Planck Institute for Tax Law and Public Finance

Date Written: November 21, 2018

Abstract

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

Windsteiger, Lisa, Monopolistic Supply of Sorting, Inequality and Welfare (November 21, 2018). Working Paper of the Max Planck Institute for Tax Law and Public Finance No. 2018-15, Available at SSRN: https://ssrn.com/abstract=3288501 or http://dx.doi.org/10.2139/ssrn.3288501

Lisa Windsteiger (Contact Author)

Max Planck Institute for Tax Law and Public Finance ( email )

Marstallplatz 1
Munich, 80539
Germany

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