European Central Bank publishes working paper on zero-leakage firm ownership structures and market power distortions

The European Central Bank has published a working paper by Yunus Aksoy, Arup Daripa and Issam Samiri modelling how alternative firm ownership and remuneration structures could reduce the macroeconomic distortions associated with market power by eliminating “incentive leakage” from monopoly profits. The paper notes it does not represent the views of the ECB. In a dynamic general equilibrium model with monopolistic competition, the authors define incentive leakage as the standard treatment of monopoly profits as lump-sum transfers to households, which weakens substitution incentives for labour and capital provision and results in under-provision of inputs relative to marginal products. They show this leakage arises even under a firm-level planner maximising owners’ utility, and then analyse decentralised “zero-leakage” institutions where all firm revenue net of any non-tied factor costs is paid proportionally to tied-factor providers, creating within-firm competition and oversupply of the tied factor that dampens effective monopoly exploitation and generates a positive aggregate demand externality. Comparing steady-state welfare to a Golden Rule benchmark, the paper distinguishes a “monopoly gap” (monopolistic vs perfect competition) and a “patience gap” (perfect competition vs Golden Rule) and finds, in simulations, that tying capital to the firm (Entrepreneurial Shareholders) can close the monopoly gap and part of the patience gap, potentially exceeding perfect-competition steady-state welfare, while tying labour (Entrepreneurial Workers) closes part of the monopoly gap but remains below perfect competition; a workers’ enterprise structure endogenously chooses revenue shares that behave close to the capital-tied case.