Working Paper: NBER ID: w25609
Authors: Germán Gutiérrez; Callum Jones; Thomas Philippon
Abstract: We propose a model to identify the causes of rising profits and concentration, and declining entry and investment in the US economy. Our approach combines a rich structural DSGE model with cross-sectional identification from firm and industry data. Using asset prices, our model estimates the realized and anticipated shocks that drive the endogeneity of entry and concentration and recovers shocks to entry costs. We validate our approach by showing that the model-implied entry shocks correlate with independently constructed measures of entry regulation and M&A activities. We conclude that entry costs have risen and that the ensuing decline in competition has depressed consumption by five to ten percent.
Keywords: Corporate Investment; Competition; Tobin's Q; Zero Lower Bound
JEL Codes: D4; E2; E3; L4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Rising entry costs (D49) | Decline in competition (L13) |
| Decline in competition (L13) | Depressed consumption (E21) |
| Rising entry costs (D49) | Increased industry concentration (L19) |
| Increased industry concentration (L19) | Reduced investment (G31) |
| Anticipated demand shocks (D84) | Entry rates (L11) |
| Positive demand shock (E39) | Increased entry (Y60) |
| Increased entry (Y60) | Reduced concentration (D30) |
| Increase in entry costs (L11) | Fewer firms entering the market (L19) |
| Fewer firms entering the market (L19) | Increased concentration (D30) |
| Increase in entry costs (L11) | Decreased industry-level real output (L16) |
| Decrease in competition since 2003 (L19) | Consumption would have been significantly higher (E21) |
| Decrease in competition since 2003 (L19) | Capital stock would have been 1 to 3 percent higher (E22) |