Abstract:" We analyze the real effects of market power induced by ownership concentration in the presence of bankruptcy costs due to costly state verification. We find that, for an economy where the probability of bankruptcy and associated costs are sufficiently low, greater concentration of common ownership, which increases market power, reduces the cost of business credit, thereby positively affecting output. However, this positive effect is more than offset by the reduction in output and consumer surplus typically induced by market power. Conversely, in an economy where the probability of bankruptcy and associated costs are high, greater market power associated with increased ownership concentration can be beneficial in terms of welfare. This is because reducing the cost of credit also reduces aggregate bankruptcy costs, leading to a positive effect. Under these circumstances, there is an optimal level of common ownership that maximizes aggregate welfare. Comparing this with the U.S. economy, we find that this optimal level exists, but the actual level documented in the literature is higher, resulting in the observed negative effects. "
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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