Competition, Markups, and Predictable Returns

Abstract

<jats:title>Abstract</jats:title> <jats:p>This paper jointly examines the link between competition and expected returns in the time series and in the cross-section. To this end, we build a general equilibrium model where markups vary because of firm entry with oligopolistic competition. When concentration is high, markups are more sensitive to entry risk. We find that higher markups are associated with higher expected returns over time and across industries, in line with the data. The model can also quantitatively account for the persistent rise in aggregate risk premiums and macroeconomic volatility associated with the secular increase trend industry concentration since the mid-1980s.</jats:p>

Uncertainty-Induced Reallocations and Growth

“…We rationalize these novel empirical findings in a multi-sector production economy with endogenous growth sustained by R&D investments that create new patents, a form of intangible capital. Like in Comin and Gertler (2006) and Kung and Schmid (2015), patents grant monopolistic rents that are procyclical, volatile, and more sensitive to fundamental shocks than the marginal return of physical private capital and government capital. As a result, in our economy intangible capital is essential for growth, but it is also risky.…”

Networks in Production: Asset Pricing Implications

“…The theoretical model features perfect competition, hence it is uninformative about network beta heterogeneity at the firm level. For this reason, my mechanism is different from Loualiche () and Corhay, Kung, and Schmid (). Industry competition may be related to changes in the network factors, but the interplay between competition and exposure to network factors is beyond the scope of this paper.…”

“…In my model, changes in network sparsity and concentration can be interpreted as reflecting technological innovation—they are distinct risk factors that result from changes in technology. Corhay, Kung, and Schmid () study time‐variation in industry competitiveness and its implication for the equity premium. My model features perfect competition and the network factors are priced, as they reflect changes in the production technology rather than changes in industry competition.…”

Persistent Government Debt and Aggregate Risk Distribution

“…Belo, Gala, and Li (2013) and Belo and Yu (2013) examine the effects of government investment and spending on asset prices. All of these studies abstract away from the endogenous technological progress highlighted in Kung and Schmid (2015) and Corhay et al (2015). Corhay et al (2018) examines the interplay of government debt maturity and inflation.…”