Monopoly rights can reduce income big time.

Abstract We ask for which part of the observed cross-country differences in the level of per-capita income monopoly rights can account. We answer this question in a calibrated growth model with capital. Monopoly rights in the capital-producing sector shield labor market insiders from the competition by outsiders and permit coalitions of these insiders to choose inefficient technologies or working practices. We find that monopoly rights can reduce the level of per-capita income by quantitatively substantial amounts that are much larger than previously claimed. Moreover, the effects of monopoly rights on the price of capital goods relative to consumption goods and the investment share in output are quantitatively consistent with the Penn World Tables. The key to our findings is that monopoly rights in the capital-producing sector do not only reduce total factor productivity there but also increase the relative price of capital. This reduces the capital-labor ratio in the rest of the economy