Low Interest Rates, Market Power, and Productivity Growth

63 Pages Posted: 4 Feb 2019 Last revised: 19 Aug 2020

See all articles by Ernest Liu

Ernest Liu

Princeton University

Atif R. Mian

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

Amir Sufi

University of Chicago - Booth School of Business; NBER

Date Written: August 18, 2020

Abstract

This study provides a new theoretical result that a decline in the long-term interest rate can trigger a stronger investment response by market leaders relative to market followers, thereby leading to more concentrated markets, higher profits, and lower aggregate productivity growth. This strategic effect of lower interest rates on market concentration implies that aggregate productivity growth declines as the interest rate approaches zero. The framework is relevant for anti-trust policy in a low interest rate environment, and it provides a unified explanation for rising market concentration and falling productivity growth as interest rates in the economy have fallen to extremely low levels.

Suggested Citation

Liu, Ernest and Mian, Atif R. and Sufi, Amir, Low Interest Rates, Market Power, and Productivity Growth (August 18, 2020). 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 - Princeton 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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