The Oligopoly Lucas Tree: Consumption Risk and Industry-Level Risk Exposure
69 Pages Posted: 26 May 2020 Last revised: 21 Aug 2020
Date Written: August 20, 2020
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
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