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MARKET POWER AND THE AGGREGATE SAVING RATE

Published online by Cambridge University Press:  15 February 2018

Andrea Giusto  and
Talan B. İşcan
Andrea Giusto*
Affiliation:
Dalhousie University
Talan B. İşcan
Affiliation:
Dalhousie University
*
Address correspondence to: Dr Andrea Giusto, Department of Economics, Dalhousie University, 6214 University Avenue, Halifax, P.O. Box 15000, NS, B3H 4R2, Canada; e-mail: andrea.giusto@dal.ca.
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Abstract

Can increasing market power cause a decrease in the aggregate savings? We answer this question by using a heterogeneous agents model that features both idiosyncratic labor and capital income risk. Under complete markets, the saving rate does not depend on the degree of market power, but when markets are incomplete, higher markups substantially reduce the aggregate saving rate. This is due to endogenous changes in the distribution of income and wealth. A calibration of the model using the observed changes in market power in the United States since the 1970s closely matches the decline in the US saving rate. Furthermore, when market power increases, the model generates distributional changes that are consistent with the data.

Keywords

Aggregate Saving RateMarket PowerIncomplete MarketsHeterogeneous Agents
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 6 , September 2019 , pp. 2269 - 2297
Copyright
Copyright © Cambridge University Press 2018 

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Footnotes

We thank seminar participants at Bates College, St. Francis Xavier University, Southern Methodist University, and the MED study group at Dalhousie for comments and suggestions. İşcan thanks Universidad Carlos III de Madrid for its hospitality during the early stages of this research. This research was not externally funded. The authors declare no competing financial interests.

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