Monopolistic supply of sorting, inequality, and welfare. (3rd June 2021)

• Record Type: Journal Article
• Authors: Windsteiger, Lisa
• Is Part Of: Journal of public economic theory. Volume 23:Number 5(2021)
• Page Start: 801
• Page End: 821
• Publication Date: 2021-06-03
• Subjects: Economic policy -- Periodicals; Finance, Public -- Periodicals; 338.9005
• DOI: 10.1111/jpet.12518
• Languages: English
• ISSNs: 1097-3923

Abstract

Abstract: Why is an increase in income inequality often accompanied by an increase in socioeconomic segregation? And what are the welfare implications of this comovement? This paper uses a theoretical model to analyze the relationship between income inequality and socioeconomic segregation. It shows that rising inequality can trigger sorting according to income, as a monopolist's profits from offering sorting increase with income inequality. It also examines the relationship between sorting and social welfare and shows that profit‐maximizing sorting patterns are not necessarily optimal from a welfare perspective. In fact, for a broad field of income distributions (monopolist) profits increase with inequality, while at the same time total welfare from sorting decreases.