Bernardo Mottironi (London School of Economics)
This paper offers a novel perspective on the general equilibrium effects of labour market power. By developing a tractable model of entrepreneurship with monopsonistic labour markets and endogenous technology adoption, I show that labour market power diminishes aggregate productivity through three distinct channels: (i) misallocation of workers towards small firms, (ii) excess entry of low-ability entrepreneurs, and (iii) limited diffusion of productivity-enhancing technologies. The proposed theory generates testable predictions, which I validate with novel evidence from Italian microdata: at the province-level, weaker competition in labour markets is associated with greater misallocation, more entrepreneurship, reduced firm size, inferior use of intangibles, and lower productivity. To quantify aggregate losses, I calibrate the model with measures of market power from financial statements, information on IT adoption from survey data, and expenditure shares from national accounts. My results reveal a significant impact of labour market power: aggregate productivity in a typical province is 21% lower than in a competitive benchmark, with excess entry and limited technology diffusion being the dominant factors.