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Class Struggle in a Schumpeterian Economy

Chu, Angus and Kou, Zonglai and Wang, Xilin (2021): Class Struggle in a Schumpeterian Economy.

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Abstract

This study explores class struggle between workers and capitalists in a Schumpeterian economy. We consider the limit on the market power of monopolistic firms as a government policy instrument and derive its optimal levels for workers and capitalists, respectively. Capitalists prefer more powerful monopolistic firms than workers. However, even workers prefer monopolistic firms to have some market power because profit provides incentives for innovation. Workers' utility-maximizing degree of monopoly power is decreasing in their discount rate and increasing in innovation productivity and the quality step size. Capitalists' utility-maximizing degree of monopoly power is increasing in the quality step size. We use the difference in the utility-maximizing degrees of monopoly power for workers and capitalists to measure the severity of their conflict, which becomes less severe when workers' discount rate falls or innovation productivity rises. Finally, at a small (large) quality step size, enlarging the step size mitigates (worsens) their conflict.

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