American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Market Power and Capital Constraints
American Economic Review
(pp. 1309–39)
Abstract
We explore how traders' equity capitalization influences asset prices in a framework that accounts for market power. In our model, traders with capital constraints engage in transactions in an imperfectly competitive market. We demonstrate that looser capital constraints elevate both asset prices and price impact, the latter diminishing market liquidity. Using Canadian Treasury auction data, we illustrate how to apply our model to quantify these effects. We estimate the shadow costs of capital constraints by leveraging a temporary policy exemption during 2020–2021. We show that while these constraints are only infrequently binding, their relative impact when activated can be sizable.Citation
Wittwer, Milena, and Jason Allen. 2026. "Market Power and Capital Constraints." American Economic Review 116 (4): 1309–39. DOI: 10.1257/aer.20231202Additional Materials
JEL Classification
- E63 Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
- G12 Asset Pricing; Trading Volume; Bond Interest Rates
- G14 Information and Market Efficiency; Event Studies; Insider Trading
- G23 Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors
- G41 Behavioral Finance: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets [Neurofinance]
- L13 Oligopoly and Other Imperfect Markets