Market power, inequality, and financial instability

Over the last four decades, the U.S. economy has experienced a few secular trends: declining labor share, increasing profit share, widening income and wealth inequalities, rising household sector leverage and associated financial instability, manifested in an increase in the probability of financial crises. This paper provides a unifying framework for explaining these trends based on a rise in firm market power in both product and labor markets. We develop a general equilibrium model and show that the rise in firm market power over the last few decades can generate all of these secular trends.