Asset Bubbles and Product Market Competition
CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy
This paper studies the interactions between asset bubbles and competition. I first document a negative industrylevel relationship between measures of stock market overvaluation and indicators of market power: larger overvaluation is associated with an increase in the number of firms, lower markups and a higher probability of negative earnings. I then construct multi-industry growth model featuring imperfect competition and rational bubbles that sheds light on these findings. By providing an entry or production subsidy, bubbles stimulate competition and reduce monopoly rents. When they are sufficiently large they can, however, lead to excessive entry and competition. I also show that imperfect competition depresses the interest rate, thereby relaxing the conditions for the emergence of rational bubbles.
Keywords: Rational Bubbles; Competition; Market Power; British Railway Mania; Dotcom Bubble (search for similar items in EconPapers)
JEL-codes: E44 L13 L16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-fdg, nep-fmk, nep-ind, nep-mac and nep-ore
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Working Paper: Asset Bubbles and Product Market Competition (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:607
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