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Market Power and Capital Constraints

Milena Wittwer & Jason Allen

The American Economic Review2026https://doi.org/10.1257/aer.20231202article
FT50AJG 4*ABDC A*
Weight
0.50

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. (JEL E63, G12, G14, G23, G41, L13)

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https://doi.org/https://doi.org/10.1257/aer.20231202

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@article{milena2026,
  title        = {{Market Power and Capital Constraints}},
  author       = {Milena Wittwer & Jason Allen},
  journal      = {The American Economic Review},
  year         = {2026},
  doi          = {https://doi.org/https://doi.org/10.1257/aer.20231202},
}

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Evidence weight

0.50

Balanced mode · F 0.40 / M 0.15 / V 0.05 / R 0.40

F · citation impact0.50 × 0.4 = 0.20
M · momentum0.50 × 0.15 = 0.07
V · venue signal0.50 × 0.05 = 0.03
R · text relevance †0.50 × 0.4 = 0.20

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