Market Power in Neoclassical Growth Models

Laurence Ball and N. Gregory Mankiw

No 28538, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper examines the optimal accumulation of capital and the effects of government debt in neoclassical growth models in which firms have market power and therefore charge prices above marginal cost. In this environment, the real interest rate earned by savers is less than the net marginal product of capital. We establish a new method for evaluating dynamic efficiency that can be applied in such economies. A plausible calibration suggests that the wedge between the real interest rate and the marginal product of capital is more than 4 percentage points and that the U.S. economy is dynamically efficient. In addition, government Ponzi schemes can have different implications for welfare than they do under competition. Even if the government can sustain a perpetual rollover of debt and accumulating interest, the policy may nonetheless reduce welfare by depressing steady-state capital and aggregate consumption. These findings suggest that even with low interest rates, as have been observed recently, fiscal policymakers should still be concerned about the crowding-out effects of government debt.

JEL-codes: E13 E22 E62 H63 O41 (search for similar items in EconPapers)
Date: 2021-03
New Economics Papers: this item is included in nep-cwa, nep-dge, nep-gro and nep-mac
Note: EFG ME
References: Add references at CitEc
Citations: View citations in EconPapers (8)

Published as Laurence Ball & N Gregory Mankiw, 2023. "Market Power in Neoclassical Growth Models," The Review of Economic Studies, vol 90(2), pages 572-596.

Downloads: (external link)
http://www.nber.org/papers/w28538.pdf (application/pdf)

Related works:
Journal Article: Market Power in Neoclassical Growth Models (2023)
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:nbr:nberwo:28538

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w28538

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().