Low Interest Rates, Market Power, and Productivity Growth

89 Pages Posted: 4 Feb 2019 Last revised: 5 Apr 2019

See all articles by Ernest Liu

Ernest Liu

Princeton University

Atif R. Mian

Princeton University - Department of Economics; Princeton University - Woodrow Wilson School of Public and International Affairs; NBER

Amir Sufi

University of Chicago - Booth School of Business; NBER

Date Written: January 22, 2019

Abstract

How does the production side of the economy respond to a low interest rate environment? This study provides a new theoretical result that low interest rates encourage market concentration by giving industry leaders 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 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.

Suggested Citation

Liu, Ernest and Mian, Atif R. and Sufi, Amir, Low Interest Rates, Market Power, and Productivity Growth (January 22, 2019). Available at SSRN: https://ssrn.com/abstract=3320551 or http://dx.doi.org/10.2139/ssrn.3320551

Ernest Liu

Princeton University

22 Chambers Street
Princeton, NJ 08544-0708
United States

Atif R. Mian (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

Princeton University
Princeton, NJ 08544-1021
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Amir Sufi

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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