TITLE:
Capital Market Power and Economic Growth in an Overlapping-Generations Model with Rational Expectations
AUTHORS:
Paul Ritschel
KEYWORDS:
Overlapping Generations, Market Power, Imperfect Competition, Economic Growth, Endogenous Fluctuations
JOURNAL NAME:
Theoretical Economics Letters,
Vol.13 No.5,
October
12,
2023
ABSTRACT: This paper investigates how market power of agents in the capital market
affects economic growth and output fluctuations in an overlapping-generations
model with endogenous capital accumulation. Agents interact strategically by
anticipating the influence of their savings behavior on the equilibrium return
on capital. We demonstrate that imperfect competition reduces economic growth
because agents under-save relative to the competitive benchmark. Moreover, it is shown that there exists a uniquely
determined Nash-equilibrium trajectory of the economy. However, this
trajectory may be non-monotonic and thus differ qualitatively from the
perfect-foresight trajectory in the case of perfect competition. Competitive
limits can be recovered through population growth. These findings imply that
competition in the capital market is an important driver of strong and smooth
economic growth.