Research
Capping Profits for Efficiency [Job Market Paper]
In light of recent concerns over firms’ market power, I study the impact of a novel policy—a cap on firms’ profit-to-cost ratios—on economic efficiency. I show that this tool, or the equivalent excess-profits tax, mitigates the misallocation of resources across firms due to heterogeneous markups by increasing production, particularly for high-markup firms. Unlike traditional firm-specific interventions that require firm-specific information, this policy reduces markups progressively despite being uniform for all firms. In a general equilibrium model with oligopolistic competition and CES demand, I show that the optimal cap replicates the effects of firm-specific price controls, restoring allocative efficiency. In a more general framework, I show that a mix of uniform tax rates—excess-profits, profit, and sales tax—can implement the social optimum. The quantitative estimates of the optimal mix prescribe a positive excess-profits tax, a negative sales tax, and a zero (or even negative) profit tax.