Thorstein Veblen, Joan Robinson, and George Stigler (Probably) Never Met: Social Preferences, Monopsony, and Government Intervention
41 Pages Posted: 19 Feb 2020
Date Written: January 23, 2020
Wages and employment are too low in a monopsony. Furthermore, a minimum wage or a subsidy may raise employment up to its first-best level. First, we analyze whether these important predictions still hold if workers compare their income to that of a reference group. Second, we show that the undistorted, competitive outcome may no longer constitute the benchmark for welfare comparisons. Third, we derive a condition which guarantees that the monopsony distortion is exactly balanced by the impact of social comparisons. Finally, we show how wage restrictions and subsidies or taxes can be used to ensure this condition both for a welfarist and a paternalistic welfare objective.
Keywords: social preferences, government intervention, minimum wage, monopsony, taxation, wage regulation
JEL Classification: D10, H21, J30, J42
Suggested Citation: Suggested Citation