Common ownership and uncertainty

Giommaria Spano

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

Abstract: This study explores the effects of economic uncertainty on general equilibrium when firms hold market power due to common ownership. By modifying the model of Azar and Vives (2021) and introducing uncertainty as shocks to consumer preferences, we examine how this influences the decisions of both workers and firms. The results clearly show that uncertainty has real effects on the economy, both in a single-sector model and in the multi-sector model. In the single-sector model, uncertainty leads to variations in labor supply based on consumers' expectations regarding the future value of consumption. If consumers assign a higher expected value to future consumption, they increase their labor supply to finance higher levels of consumption. Conversely, a lower expected value of consumption reduces workers' willingness to work, causing a contraction in labor supply and a decrease in total production. In the multi-sector model, uncertainty is more pervasive. Despite the expected value of each shock remaining unchanged, the inability of economic agents to fully diversify risk across different sectors amplifies the effects of uncertainty, leading to a negative impact on overall economic outcomes. In terms of welfare, the introduction of uncertainty results in a decrease in the overall well-being of both workers and firm owners. Although market power can reduce losses due to uncertainty, it simultaneously leads to a lower level of economic welfare.

Keywords: Common Ownership; uncertainty; general equilibrium; Market power (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:cns:cnscwp:202421

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