The Oligopoly Lucas Tree: Consumption Risk and Industry-Level Risk Exposure

69 Pages Posted: 26 May 2020 Last revised: 21 Aug 2020

See all articles by Winston Dou

Winston Dou

The Wharton School, University of Pennsylvania

Yan Ji

Hong Kong University of Science & Technology (HKUST)

Wei Wu

Texas A&M University

Date Written: August 20, 2020

Abstract

We analyze the quantitative asset-pricing implications of peers' strategic rivalry by embedding oligopolistic competition within an endowment economy. Rivalry intensity increases endogenously as the discount rate rises or expected growth declines, because peers care less about future cooperation. We decompose industries' exposure to consumption risk into two components, reflecting news about expected growth and discount rates. More profitable and value industries are more exposed to discount-rate and expected-growth fluctuations, respectively. Finally, we exploit the exogenous variation in the growth dynamics and market structure of industries, instrumented using natural disasters and unexpected large tariff cuts respectively, to test the central mechanisms.

Keywords: Product market friction, Discount rates, Expected growth, Consumption risk, Strategic rivalry, Natural experiments.

JEL Classification: G12, L13, O33, C73

Suggested Citation

Dou, Winston and Ji, Yan and Wu, Wei, The Oligopoly Lucas Tree: Consumption Risk and Industry-Level Risk Exposure (August 20, 2020). Available at SSRN: https://ssrn.com/abstract=3604841 or http://dx.doi.org/10.2139/ssrn.3604841

Winston Dou (Contact Author)

The Wharton School, University of Pennsylvania ( email )

2318 Steinberg Hall - Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

Yan Ji

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Wei Wu

Texas A&M University ( email )

360M Wehner
College Station, TX 77843-4218
United States
979-862-8092 (Phone)

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