Financial Markets, Industry Dynamics, and Growth

Abstract

We study the impact of corporate governance frictions in an economy where growth is driven both by the foundation of new Örms and by the in-house investment of incumbent Örms. Firmsí managers engage in tunneling and empire building activities. Active shareholders monitor managers, but can shirk on their monitoring, to the detriment of minority (passive) shareholders. The analysis reveals that these conáicts among Örmsí stakeholders inhibit the entry of new Örms, thereby increasing market concentration. Despite depressing investment returns in the short run, the frictions can however lead incumbents to invest more aggressively in the long run to exploit the concentrated market structure. Financial Markets, Industry Dynamics, and Growth AbstractWe study the impact of corporate governance frictions in an economy where growth is driven both by the foundation of new Örms and by the in-house investment of incumbent Örms. Firmsí managers engage in tunneling and empire building activities. Active shareholders monitor managers, but can shirk on their monitoring, to the detriment of minority (passive) shareholders. The analysis reveals that these conáicts among Örmsí stakeholders inhibit the entry of new Örms, thereby increasing market concentration. Despite depressing investment returns in the short run, the frictions can however lead incumbents to invest more aggressively in the long run to exploit the concentrated market structure. By means of quantitative analysis, we characterize conditions under which corporate governance reforms boost or reduce welfare.

Dynamic effects of patent policy on innovation and inequality in a Schumpeterian economy

“…In this section, we calibrate the model to aggregate US data in order to perform a quantitative analysis. The model features the following parameters: f ; ; ; ; ; g. We follow Iacopetta et al (2019) to set the degree of technology spillovers 1 to 0.833. We set the discount rate to 0.03 and the markup to 1.40, which is at the upper bound of the range of values reported in Jones and Williams (2000).…”

Dynamic effects of minimum wage on growth and innovation in a Schumpeterian economy

“…We set the discount rate to 0.04. We follow Iacopetta et al (2019) to set the degree of technology spillovers 1 to 0.833. From the estimates in Heathcote et al (2010), we consider 2 [0:25; 0:75] as a plausible range for the intensity of low-skill labor.…”

Growing through Spinoffs. Corporate Governance, Entry, and Innovation

“…)consider a growth economy where con ‡icts between managers and shareholders a¤ect …rms'investment decisions, but they take …rm entry as given. In Iacopetta et al (2019) con ‡icts between managers and shareholders a¤ect the returns to de novo …rm entry and to incumbents'investment. Do novo entry and incumbents'investment do interact with each other, but this interaction occurs solely through the structure of the industry.…”

“…New …rms, in turn, comprise …rms founded ex novo by households (de novo entries) and spino¤s of incumbent …rms. To capture the sizeable share of spino¤s created in con ‡ict with parent companies, we draw from the literature that has extended endogenous growth theory to include corporate governance frictions (e.g., Terry, 2017;Iacopetta et al, 2019;Celik and Tian, 2018). Households can act as …rm managers and shareholders; managers are in charge of executing production and investment plans.…”