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Asset Pricing with Entry and Imperfect Competition

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  • Erik Loualiche

    (MIT Sloan School of Management)

Abstract

I study the implications of fluctuations in new firm creation across industries for asset prices and macroeconomic quantities. I write a general equilibrium model with heterogeneous industries, allowing for firm entry and time variation in markups. Firms entering an industry increase competition and displace incumbents' monopoly rents. This mechanism is strongest in industries that exhibit high profit margins and high elasticity of innovation to the cost of entry. A positive shock to the aggregate cost of entry increases the marginal utility of consumption --the price of entry risk is negative. Therefore, firms with more exposure to rents' displacement have higher expected excess returns. Using micro-level data on entry rates, I trace out the impact of firm creation on incumbent firms' profitability and stock returns. The effect is strongest for the types of industries the model predicts. I confirm aggregate entry risk is priced: differential exposure to the aggregate entry shock explains a large fraction of the cross-industry variation in expected returns.

Suggested Citation

  • Erik Loualiche, 2014. "Asset Pricing with Entry and Imperfect Competition," 2014 Meeting Papers 263, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:263
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    Cited by:

    1. Savagar, Anthony, 2021. "Measured productivity with endogenous markups and economic profits," Journal of Economic Dynamics and Control, Elsevier, vol. 133(C).
    2. Marta Aloi & Huw Dixon & Anthony Savagar, 2021. "Labor Responses, Regulation, and Business Churn," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(1), pages 119-156, February.
    3. Grüning, Patrick, 2017. "International endogenous growth, macro anomalies, and asset prices," Journal of Economic Dynamics and Control, Elsevier, vol. 78(C), pages 118-148.

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