Working Paper: NBER ID: w25505
Authors: Ernest Liu; Atif Mian; Amir Sufi
Abstract: This study provides a new theoretical result that a decline in the long-term interest rate can trigger a stronger investment response by market leaders relative to market followers, thereby leading to more concentrated markets, higher profits, and lower aggregate productivity growth. This strategic effect of lower interest rates on market concentration implies that aggregate productivity growth declines as the interest rate approaches zero. The framework is relevant for anti-trust policy in a low interest rate environment, and it provides a unified explanation for rising market concentration and falling productivity growth as interest rates in the economy have fallen to extremely low levels.
Keywords: Interest Rates; Market Power; Productivity Growth
JEL Codes: E2; E22; G01; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decline in long-term interest rates (E43) | Stronger investment response from market leaders (G11) |
| Stronger investment response from market leaders (G11) | Increased market concentration (D49) |
| Increased market concentration (D49) | Higher profits (D33) |
| Higher profits (D33) | Lower aggregate productivity growth (O49) |
| Decline in long-term interest rates (E43) | Increased market concentration (D49) |
| Decline in long-term interest rates (E43) | Lower aggregate productivity growth (O49) |