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Asset prices and rents in a GE model with imperfect competition

  • Pierre Lafourcade
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    This paper analyses the general equilibrium effects on asset valuation and capital accumulation of an exogenous drop in the rate of return required by investors in a model of production with imperfectly competitive product markets. The model improves substantially on the standard perfectly competitive neo-classical framework, by dissociating the behavior of marginal and average q. It tracks more closely current observed data on the ratio of stock-market value to the economy's capital base, while uncoupling this valuation ratio from investment behavior. The model does so by assuming that asset holders price not only the future marginal productivity of capital, but also the value of monopoly franchises, which arise from the interplay of market power and returns to scale.

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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2003-60.

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    Date of creation: 2003
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    Handle: RePEc:fip:fedgfe:2003-60
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    7. John Heaton & Deborah Lucas, 2000. "Stock prices and fundamentals," Proceedings, Federal Reserve Bank of San Francisco, issue Apr.
    8. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
    9. Narayana R. Kocherlakota, 1996. "The Equity Premium: It's Still a Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 42-71, March.
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    11. Jason G. Cummins & Kevin A. Hassett & Stephen D. Oliner, 1999. "Investment behavior, observable expectations, and internal funds," Finance and Economics Discussion Series 1999-27, Board of Governors of the Federal Reserve System (U.S.).
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    15. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-24, January.
    16. Michael T. Kiley, 2000. "Stock prices and fundamentals in a production economy," Finance and Economics Discussion Series 2000-05, Board of Governors of the Federal Reserve System (U.S.).
    17. Ian Domowitz & R. Glenn Hubbard & Bruce C. Petersen, 1986. "Market Structure and Cyclical Fluctuations in U.S. Manufacturing," NBER Working Papers 2115, National Bureau of Economic Research, Inc.
    18. Sumru Altug & Alpay Filiztekin, 2002. "Scale effects, time-varying markups, and the cyclical behaviour of primal and dual productivity," Applied Economics, Taylor & Francis Journals, vol. 34(13), pages 1687-1702.
    19. Susanto Basu & John G. Fernald, 1996. "Returns to scale in U.S. production: estimates and implications," International Finance Discussion Papers 546, Board of Governors of the Federal Reserve System (U.S.).
    20. Jean-Fran├žois Fagnart & Omar Licandro & Franck Portier, 1999. "Firm Heterogeneity, Capacity Utilization and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 433-455, April.
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    23. Roger E. A. Farmer, 1999. "Macroeconomics of Self-fulfilling Prophecies, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062038, June.
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