Market Power in Capital Markets: Misallocation and Growth
Prof. Michael Choi
Associate Professor of Economics
University of California, Irvine
This paper develops a general equilibrium model in which rms are heteroge-nous and experience idiosyncratic productivity shocks that require capital reallocation through a frictional dealer market. The market power of dealers is endogenous: dealers can enhance their bargaining power by exerting costly effort. We examine the implica-tions for capital misallocation and growth. The model admits multiple balanced-growth paths, each associated with distinct real interest rates, growth rates, and TFP levels. We investigate the role of endogenous bargaining power in the presence of a learning- by-doing externality. We conclude by offering a reinterpretation in terms of information acquisition and price discrimination.
