Abstract:" We study the macroeconomic effects of within-sector common ownership in an economy with costly bankruptcy. Common ownership softens competition and raises firms’ expected profits, which lowers default risk and reduces the equilibrium cost of credit. When bankruptcy costs are small, this financial channel is weak: softer competition mainly reduces employment and output, so aggregate welfare is maximized when common ownership is absent. When bankruptcy costs are large, instead, the reduction in default risk and liquidation losses becomes quantitatively important and can outweigh the standard distortion from weaker competition. In this case, welfare and output are maximized at an interior level of within-sector common ownership. "
Financial frictions and market power accumulation
Abstract: " This paper examines the interplay between market power and financial frictions, highlighting the bidirectional relationship between firms’ access to finance and competitive dynamics. We develop a theoretical model where firms invest in technology to enhance product quality, which increases their market power. In our model, firms with greater market power can invest more, thereby reinforcing and accumulating additional market power in subsequent periods. However, the general equilibrium effects of reducing financial frictions are not clear. Specifically, when financial frictions are relaxed, firms can invest more, enabling them to produce at higher margins. This results in an increase in aggregate average market power. On the other hand, a reduction in financial frictions could also facilitate the entry of new firms into the market, thereby increasing competitive pressure. Our results indicate that an increase in investment, driven by reduced financial frictions, does not necessarily enhance competition unless the entry of new firms accompanies it. Through empirical analysis, using data from publicly listed U.S. firms, we test that firms with more market power are subjected to less financial frictions pressure in the subsequential periods. Empirical evidence also suggests higher levels of market power in the earlier period are correlated with less financial constraints in later periods."
Abstract : " This study explores the effects of economic uncertainty on general equilibrium when firms hold market power due to common ownership. By modifying the model of Azar and Vives (2021) and introducing uncertainty as shocks to consumer preferences, we examine how this influences the decisions of both workers and firms. The results clearly show that uncertainty has real effects on the economy, both in a single-sector model and in the multi-sector model. In the single-sector model, uncertainty leads to variations in labor supply based on consumers’ expectations regarding the future value of consumption. If consumers assign a higher expected value to future consumption, they increase their labor supply to finance higher levels of consumption. Conversely, a lower expected value of consumption reduces workers’ willingness to work, causing a contraction in labor supply and a decrease in total production. In the multi-sector model, uncertainty is more pervasive. Despite the expected value of each shock remaining unchanged, the inability of economic agents to fully diversify risk across different sectors amplifies the effects of uncertainty, leading to a negative impact on overall economic outcomes. In terms of welfare, the introduction of uncertainty results in a decrease in the overall well-being of both workers and firm owners. Although market power can reduce losses due to uncertainty, it simultaneously leads to a lower level of economic welfare."
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