Working Paper: NBER ID: w23583
Authors: Germn Gutierrez; Thomas Philippon
Abstract: The U.S. business sector has under-invested relative to Tobin's Q since the early 2000's. We argue that declining competition is partly responsible for this phenomenon. We use a combination of natural experiments and instrumental variables to establish a causal relationship between competition and investment. Within manufacturing, we show that industry leaders invest and innovate more in response to exogenous changes in Chinese competition. Beyond manufacturing we show that excess entry in the late 1990's, which is orthogonal to demand shocks in the 2000's, predicts higher industry investment given Q. Finally, we provide some evidence that the increase in concentration can be explained by increasing regulations.
Keywords: competition; investment; concentration; regulations
JEL Codes: D4; E22; G31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| declining competition (L13) | underinvestment (G31) |
| excess entry in the late 1990s (E65) | higher industry investment (G31) |
| increasing regulations (G18) | rising industry concentration (L19) |
| rising industry concentration (L19) | investment decisions (G11) |