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Monopolistic Supply of Sorting, Inequality and Welfare

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  • Lisa Windsteiger

Abstract

Why is an increase in income inequality often accompanied by an increase in socio-economic segregation? And what are the welfare implications of this co-movement? This paper uses a theoretical model to analyze the relationship between income inequality and socio-economic segregation. It shows that rising inequality can trigger sorting according to income, as a monopolist´s proï¬ ts from offering sorting increase with income inequality. It also examines the relationship between sorting and social welfare and shows that proï¬ t maximizing sorting patterns are not necessarily optimal from a welfare perspective. In fact, for a broad ï¬ eld of income distributions (monopolist) proï¬ ts increase with inequality, while at the same time total welfare from sorting decreases.

Suggested Citation

  • Lisa Windsteiger, 2018. "Monopolistic Supply of Sorting, Inequality and Welfare," Working Papers tax-mpg-rps-2018-15, Max Planck Institute for Tax Law and Public Finance.
    • Handle: RePEc:mpi:wpaper:tax-mpg-rps-2018-15
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    More about this item

    Keywords

    Stratification; Assortative Matching; Group Formation; Income Inequality;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification
    • Z18 - Other Special Topics - - Cultural Economics - - - Public Policy

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