Capital Market Power and Economic Growth in an Overlapping-Generations Model with Rational Expectations

This paper explores how market power of agents on the capital market affects economic growth and output fluctuations in an overlapping-generations model with endogenous capital accumulation. Agents interact strategically by anticipating how their savings affect the return on savings in equilibrium. It is shown that imperfect competition reduces economic growth since agents under-save relative to the competitive benchmark. However, the sequence of Nash equilibria may be non-monotonic and thus qualitatively different from the competitive rational-expectations dynamics. The competitive limits can be forced by population growth. The findings imply that competition in the capital market is an important driver of strong and smooth economic growth