CAPITAL DEPRECIATION AND INDUSTRY COMPETITION: EVIDENCE AND THEORY

Alicia H. Dang and Roberto Samaniego ()

International Economic Review, 2024, vol. 65, issue 2, 1081-1102

Abstract: We argue that the rate of capital depreciation is a determinant of competition. We show that the rate of capital depreciation has a robust positive relationship with market power in U.S. data. Then, we develop a general equilibrium model of industry competition where industries vary in their rate of capital depreciation. In equilibrium, optimal savings decisions imply that rapid depreciation is related to higher costs of capital, so that industries with rapid depreciation display less competition than industries with slow depreciation. Depending on parameters, the calibrated model can account for much of the observed dispersion in markups across U.S. industries.

Date: 2024
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