Rising Income Inequality and Competition: Evidence

Abstract

Income inequality in many countries has risen recently. Using aggregate data of 22 countries, this paper provides a new evidence about the factor which might contribute to the rise in income inequality. The main finding is that the lack of competition, which is measured as the rise in markup, tends to be positively associated with the rise in inequality (higher inverted Pareto-Lorenz coefficient). The result is robust with other factors considered in the previous studies, e.g. openness to trade, capital account openness, technology, etc. I also find that facing the lack of competition, top 1% individuals gain and individuals between top 10 and 5% income shares among population lose the most. One possible interpretation is that the extra profit caused by the lack of competition would be obtained disproportionately in favor of top 1% individuals and therefore income inequality would increase.