Oligarchy, underutilized capacity, and government policy

Abstract

We examine an oligarchic economy where only elites can establish firms. In monopolistic competition when the size of the elite is sufficiently small, there is an absolute exclusive equilibrium where wages are driven to the reservation wage. Because of the possession of market power by firms, total equilibrium output is insufficient to warrant the employment of the entire labor force, leading to inadequate aggregate demand for labor and underutilized capacity. The economy inefficiently operates inside its production possibilities frontier. Then, the adoption of rather unorthodox left-wing fiscal and labor policies may boost capacity utilization and lead to a Pareto improvement.