Impact of market power on capital investment and labor-augmenting innovations

Xinle Liu, Pengfei Luo and Yong Zhang

Finance Research Letters, 2025, vol. 81, issue C

Abstract: We develop a two-stage model of capital investment and labor-augmenting innovations, considering the implications of market power on investment decisions (investment size and timing) and welfare. Capital size decreases with market power, while labor-augmenting technological investment scale increases. An inverted U-shaped relationship exists between investment thresholds and market power, resulting from a trade-off between the scale and cost effects induced. Increased market power exacerbates underinvestment and labor distortions. Market power has an ambiguous impact, exacerbating the loss of social welfare.

Keywords: Capital investment; Labor-augmenting innovations; Market power; Welfare (search for similar items in EconPapers)
JEL-codes: D24 G31 O32 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:81:y:2025:i:c:s1544612325006981

DOI: 10.1016/j.frl.2025.107438

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