Working Paper: CEPR ID: DP16567
Authors: Ulrich Doraszelski; Joao F. Gomes; Felix Nockher
Abstract: Access to capital markets plays a key role for the evolution of an industry over time. We develop a benchmark theoretical setting that integrates core corporate finance insights about the impact of financial frictions on investment with those from industrial organization on dynamic competition and industry evolution under perfect capital markets. Using state of the art computational tools to systematically detect and evaluate multiple equilibria and to thoroughly explore the parameter space of our model, we show how, depending on key industry characteristics such as market size, financial frictions impact firms' pricing and investment strategies and the degree of industry concentration.
Keywords: price and investment competition; financial frictions; industry dynamics
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial frictions (G19) | lower prices (P22) |
| financial frictions (G19) | higher investment (G31) |
| financial frictions (G19) | industry concentration (L69) |
| lower prices (P22) | firm behavior (D21) |
| higher investment (G31) | firm behavior (D21) |
| firm behavior (D21) | industry dynamics (L19) |
| industry dynamics (L19) | industry concentration (L69) |