Low Interest Rates, Market Power, and Productivity Growth

NBER Working Paper No. 25505

Issued in January 2019, Revised in August 2020

NBER Program(s):Asset Pricing, Corporate Finance, Economic Fluctuations and Growth, Monetary Economics, Productivity, Innovation, and Entrepreneurship



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.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w25505