Past event

Department of Economics Seminar with Professor Yunus Aksoy, Birkbeck Business School Profits, Firm Ownership and Aggregate Demand Externalities

Professor Aksoy is a Professor of Macroeconomics at Birkbeck. He specialises in theoretical and empirical issues related to medium and business cycles in macroeconomics. Among others, he is interested in studying the impact of demographic transitions on key macroeconomic variables, various aspects of monetary policy and its design, and the relevance of financial imperfections for macroeconomic dynamics.

Abstract: In neoclassical macroeconomic models with monopolistic competition, profits are treated as a leakage from the system, accounted for in the model as a lump-sum payment to the representative agent. The phenomenon of rising profits and decreasing labour share in advanced economies creates scope for questions about the incentive effects of the distribution of profits through alternative ownership and remuneration structures of the firm. We show that the profits generated under monopolistic competition can be harnessed to generate within-firm incentives to reduce inefficiencies in factor hiring and that when all firms operate similarly, this gives rise to an additional general equilibrium effect through the internalization of an aggregate demand externality. We first specify a structure that closely resembles firms owned and operated by shareholders, who receive a share of profit in proportion to their capital contribution. The capital provision of each agent imposes a negative externality on other owners of the firm, implying that the aggregate capital provision of a firm exceeds the joint optimum. This is equivalent to the firm reducing the exploitation of its own market power. If each firm is organised in this way, this leads to a general equilibrium improvement in the aggregate welfare. We next specify a structure where workers are also capital owners, and the firm decides the optimal allocation of profits across factors through internal prices. This leads to further aggregate improvements through the provision of incentives for both capital and labour. A key lesson is that policies aimed at internal structures can be an important tool for competition authorities.

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