There are two opposing welfare effects of market power in a model with monopolistic competition, loan defaults and moral hazard. The loss of output produced if firms set a higher mark-up over marginal costs confronts with some gain due to higher expected profits and the reduction of defaults. Such tradeoff results in an optimal level of market power that decreases with the efficiency of liquidation following default on a loan. If moral hazard is pervasive, credit rationing cuts down the default rates and mitigates the welfare cost of financial frictions.
On financial frictions and firm's market power / Casares, M; Deidda, Lg; Galdon-Sanchez, Je. - In: ECONOMIC INQUIRY. - ISSN 0095-2583. - (2023). [10.1111/ecin.13146]
On financial frictions and firm's market power
Deidda, LG
;
2023-01-01
Abstract
There are two opposing welfare effects of market power in a model with monopolistic competition, loan defaults and moral hazard. The loss of output produced if firms set a higher mark-up over marginal costs confronts with some gain due to higher expected profits and the reduction of defaults. Such tradeoff results in an optimal level of market power that decreases with the efficiency of liquidation following default on a loan. If moral hazard is pervasive, credit rationing cuts down the default rates and mitigates the welfare cost of financial frictions.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
