On financial frictions and firm's market power

Miguel Casares, Luca Deidda and Jose E. Galdon‐Sanchez

Economic Inquiry, 2023, vol. 61, issue 4, 982-1005

Abstract: There are two opposing welfare effects of market power in a model with monopolistic competition, loan defaults and moral hazard. The loss of output produced if firms set a higher mark‐up over marginal costs confronts with some gain due to higher expected profits and the reduction of defaults. Such tradeoff results in an optimal level of market power that decreases with the efficiency of liquidation following default on a loan. If moral hazard is pervasive, credit rationing cuts down the default rates and mitigates the welfare cost of financial frictions.

Date: 2023
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https://doi.org/10.1111/ecin.13146

Related works:
Working Paper: On financial frictions and firm market power (2019)
Working Paper: On financial frictions and firm market power (2019)
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