Financial frictions, common ownership and firms' market power in a general equilibrium model

Giommaria Spano

Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia

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.

Keywords: Market power; financial friction; general equilibrium (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-com, nep-fdg and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://crenos.unica.it/crenos/node/8576
https://crenos.unica.it/crenos/sites/default/files/wp-24-10.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cns:cnscwp:202410

Access Statistics for this paper

More papers in Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia Contact information at EDIRC.
Bibliographic data for series maintained by CRENoS (webmaster@crenos.unica.it).