Financial Markets, Industry Dynamics and Growth

Maurizio Iacopetta (1) , Raoul Minetti (2) , Pietro Peretto (3)

1 OFCE - Observatoire français des conjonctures économiques (Sciences Po)
2 Michigan State University [East Lansing]
3 Duke University [Durham]

This article introduces corporate governance frictions into a growth model with endogenous market structure. Managers engage in corporate resource diversion and empire building. Shareholders discipline managers with incentive compensation contracts. A reform that mitigates corporate governance frictions boosts firms’ entry and, for a given market structure, has an ambiguous impact on incumbents’ return to product improvement. However, as the market structure adjusts, becoming more diffuse, incumbents invest less in product improvement. Calibrating the model to U.S. data, we find that a reform of the kind recently enacted in several advanced economies can lead to a welfare loss.

Keywords: Financial markets; Industry dynamics; Growth; Financial markets; Financial markets; Financial markets; Financial markets; Financial markets; Financial markets; Financial markets

Domains: Humanities and Social Sciences; Economics and Finance

Maurizio Iacopetta, Raoul Minetti, Pietro Peretto. Financial Markets, Industry Dynamics and Growth. The Economic Journal, 2019, 129 (621), pp.2192 - 2215. ⟨10.1111/ecoj.12635⟩. ⟨hal-03403582⟩