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

72 Pages Posted: 16 Jun 2020 Last revised: 3 Aug 2020

See all articles by Kory Kroft

Kory Kroft

University of Toronto

Yao Luo

affiliation not provided to SSRN

Magne Mogstad

Statistics Norway; IZA Institute of Labor Economics

Bradley Setzler

University of Chicago

Multiple version iconThere are 2 versions of this paper

Date Written: July 31, 2020

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: J31, J42, D44, L11

JEL Classification: imperfect competition; monopsony; market power; rents; rent sharing; auction; procurement

Suggested Citation

Kroft, Kory and Luo, Yao and Mogstad, Magne and Setzler, Bradley, Imperfect Competition and Rents in Labor and Product Markets: The Case of the Construction Industry (July 31, 2020). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2020-78, Available at SSRN: https://ssrn.com/abstract=3625752 or http://dx.doi.org/10.2139/ssrn.3625752

Kory Kroft

University of Toronto ( email )

Toronto, Ontario M5S 3G8
Canada

Yao Luo

affiliation not provided to SSRN

Magne Mogstad (Contact Author)

Statistics Norway ( email )

N-0033 Oslo
Norway

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Bradley Setzler

University of Chicago ( email )

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