Firm Ownership and the Macroeconomics of Incentive Leakages *

What is it about?

Market power of firms and consequent aggregate welfare distortions have become an important topic of discussion in macroeconomics. The standard policy response consists of attempts to introduce more competition. However, such attempts are not often very successful. We take a different approach to the problem. Taking monopoly power as given, we ask if altering the internal structure of firms can reduce the welfare distortions. We put the question within a standard dynamic general equilibrium model. In standard macroeconomics analysis, profits are distributed as a lump-sum, precluding any interesting incentive effects. We study internal structures that eliminate this incentive leakage. Such forms include shareholder-operated or worker-owned-and-operated firms that make certain internal decisions in a decentralised manner.

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Photo by Walter Otto on Unsplash

Photo by Walter Otto on Unsplash

Why is it important?

We show that such firms effectively exploit their monopoly power less. When all firms do this, an aggregate demand externality arises which improves steady state welfare. Some forms not only eliminate welfare distortion from monopoly, but improve welfare even beyond perfect competition in the steady state by achieving welfare closer to the Golden Rule level.