Author(s)

Paul Ritschel

Faculty of Business Studies and Economics, University of Kaiserslautern-Landau, Kaiserslautern and Landau in der Pfalz, Germany.

This paper investigates how market power of agents in the capital market affects economic growth and output fluctuations in an overlapping-generations model with endogenous capital accumulation. Agents interact strategically by anticipating the influence of their savings behavior on the equilibrium return on capital. We demonstrate that imperfect competition reduces economic growth because agents under-save relative to the competitive benchmark. Moreover, it is shown that there exists a uniquely determined Nash-equilibrium trajectory of the economy. However, this trajectory may be non-monotonic and thus differ qualitatively from the perfect-foresight trajectory in the case of perfect competition. Competitive limits can be recovered through population growth. These findings imply that competition in the capital market is an important driver of strong and smooth economic growth.

Overlapping Generations, Market Power, Imperfect Competition, Economic Growth, Endogenous Fluctuations

Ritschel, P. (2023) Capital Market Power and Economic Growth in an Overlapping-Generations Model with Rational Expectations. Theoretical Economics Letters, 13, 1253-1265. doi: 10.4236/tel.2023.135069.