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Impact of market power on capital investment and labor-augmenting innovations

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  • Liu, Xinle
  • Luo, Pengfei
  • Zhang, Yong

Abstract

We develop a two-stage model of capital investment and labor-augmenting innovations, considering the implications of market power on investment decisions (investment size and timing) and welfare. Capital size decreases with market power, while labor-augmenting technological investment scale increases. An inverted U-shaped relationship exists between investment thresholds and market power, resulting from a trade-off between the scale and cost effects induced. Increased market power exacerbates underinvestment and labor distortions. Market power has an ambiguous impact, exacerbating the loss of social welfare.

Suggested Citation

  • Liu, Xinle & Luo, Pengfei & Zhang, Yong, 2025. "Impact of market power on capital investment and labor-augmenting innovations," Finance Research Letters, Elsevier, vol. 81(C).
    • Handle: RePEc:eee:finlet:v:81:y:2025:i:c:s1544612325006981
    DOI: 10.1016/j.frl.2025.107438
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    Keywords

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    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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