NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Low Interest Rates, Market Power, and Productivity Growth

Ernest Liu, Atif Mian, Amir Sufi

NBER Working Paper No. 25505
Issued in January 2019, Revised in August 2019
NBER Program(s):The Asset Pricing Program, The Corporate Finance Program, The Economic Fluctuations and Growth Program, The Monetary Economics Program, The Productivity, Innovation, and Entrepreneurship Program

This study provides a new theoretical result that low interest rates encourage market concentration by raising industry leaders’ incentive to gain a strategic advantage over followers, and this effect strengthens as the interest rate approaches zero. The model provides a unified explanation for why the fall in long-term interest rates has been associated with rising market concentration, reduced business dynamism, a widening productivity-gap between industry leaders and followers, and slower productivity growth. Support for the model’s key mechanism is established by showing that a decline in the ten year Treasury yield generates positive excess returns for industry leaders, and the magnitude of the excess returns rises as the Treasury yield approaches zero.

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Document Object Identifier (DOI): 10.3386/w25505

 
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