We show how, in general equilibrium models featuring increasing returns, imperfect
competition and endogenous markups, changes in the scale of economic activity affect
income distribution across factors. Whenever final goods are gross-substitutes (gross-
complements), a scale expansion raises (lowers) the relative reward of the scarce factor
or the factor used intensively in the sector characterized by a higher degree of product differentiation and higher fixed costs. Under very reasonable hypothesis, ...
We show how, in general equilibrium models featuring increasing returns, imperfect
competition and endogenous markups, changes in the scale of economic activity affect
income distribution across factors. Whenever final goods are gross-substitutes (gross-
complements), a scale expansion raises (lowers) the relative reward of the scarce factor
or the factor used intensively in the sector characterized by a higher degree of product differentiation and higher fixed costs. Under very reasonable hypothesis, our theory suggests that scale is skill-biased. This result provides a microfoundation for the secular increase in the relative demand for skilled labor. Moreover, it constitutes an important link among major explanations for the rise in wage inequality: skill-biased technical change, capital-skill complementarities and international trade. We provide new evidence on the mechanism underlying the skill bias of scale.
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