Working Paper: CEPR ID: DP15499
Authors: Xavier Vives; Jos Azar
Abstract: We develop a tractable general equilibrium framework in which firms are large and have market power with respect to both products and labor, and in which a firm’s decisions are affected by its ownership structure. We characterize the Cournot–Walras equilibrium of an economy where each firm maximizes a share-weighted average of shareholder utilities—rendering the equilibrium independent of price normalization. In a one-sector economy, if returns to scale are non-increasing then an increase in “effective” market concentration (which accounts for common ownership) leads to declines in employment, real wages, and the labor share. Yet when there are multiple sectors, due to an intersectoral pecuniary externality, an increase in common ownership could stimulate the economy when the elasticity of labor supply is high relative to the elasticity of substitution in product markets. We characterize for which ownership structures the monopolistically competitive limit or an oligopolistic one are attained as the number of sectors in the economy increases. When firms have heterogeneous constant returns to scale technologies we find that an increase in common ownership leads to markets that are more concentrated.
Keywords: common ownership; portfolio diversification; macro economy; corporate governance; labor share; market power; oligopsony; antitrust policy
JEL Codes: D43; D51; E11; L21; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Effective market concentration (L13) | Declines in employment (J63) |
| Effective market concentration (L13) | Declines in real wages (J39) |
| Effective market concentration (L13) | Declines in labor share (E25) |
| Common ownership (G32) | Effective market concentration (L13) |
| Common ownership (G32) | Stimulate the economy (E65) |
| Number of sectors (C42) | Monopolistically competitive limit or oligopolistic limit (D43) |