Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/322044 
Year of Publication: 
2025
Series/Report no.: 
ECB Working Paper No. 3033
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
Questions about market power have become salient in macroeconomics. We consider the role of institutional structures in addressing these within a dynamic general equilibrium framework. Standard models account for monopoly profits as a lump-sum transfer to the representative agent. We label this an "incentive leakage," and show this to be a general characteristic of firm-optimal arrangements. We show that shareholder-operated or worker-operated firms that eliminate leakage can generate within-firm incentives that effectively reduce monopoly distortion in equilibrium. When all firms operate similarly, an additional general equilibrium effect arises through internalization of an aggregate demand externality. We characterize steady-state welfare across structures, and show how zero-leakage institutions lead to improvements towards the Golden Rule benchmark. Overall, our paper takes the first step towards an analysis of the macroeconomics of institutions without incentive leakage.
Subjects: 
Monopolistic competition
incentive leakage
aggregate demand externality
Golden Rule
patience gap
monopoly gap
JEL: 
E10
E22
E24
E25
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-7125-6
Document Type: 
Working Paper

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