On financial frictions and firm market power

Miguel Casares, Luca Deidda and José E. Galdón-Sánchez ()
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José E. Galdón-Sánchez: Universidad Pública de Navarra

No 1929, Working Papers from Banco de España

Abstract: We build a static general-equilibrium model with monopolistically competitive firms that borrow funds from competitive banks in an economy subject to financial frictions. These frictions are due to non verifiability of both ex post firm returns and managerial effort. Market power has opposing effects. On one side, firms’ pricing over marginal cost reduces output compared to perfect competition. On the other, by increasing firms’ profitability, market power reduces the impact of financial frictions. The resulting tradeoff is ambiguous. We show that, other things equal, there exists an optimal positive level of market power that maximizes welfare. Such optimal degree of market power increases with moral hazard and decreases with the efficiency of firm liquidation following bankruptcy.

Keywords: market power; moral hazard; bankruptcy; liquidation (search for similar items in EconPapers)
JEL-codes: E44 G21 G33 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2019-08
New Economics Papers: this item is included in nep-cfn, nep-com and nep-mac
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Related works:
Journal Article: On financial frictions and firm's market power (2023)
Working Paper: On financial frictions and firm market power (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1929

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