Declining Competition and Investment in the U.S.

Germán Gutiérrez, Thomas Philippon

NBER Working Paper No. 23583
Issued in July 2017
NBER Program(s):Corporate Finance Program, Economic Fluctuations and Growth Program, Industrial Organization Program, Monetary Economics Program, Public Economics Program, Productivity, Innovation, and Entrepreneurship Program

The U.S. business sector has under-invested relative to Tobin's Q since the early 2000's. We argue that declining competition is partly responsible for this phenomenon. We use a combination of natural experiments and instrumental variables to establish a causal relationship between competition and investment. Within manufacturing, we show that industry leaders invest and innovate more in response to exogenous changes in Chinese competition. Beyond manufacturing we show that excess entry in the late 1990's, which is orthogonal to demand shocks in the 2000's, predicts higher industry investment given Q. Finally, we provide some evidence that the increase in concentration can be explained by increasing regulations.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w23583

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