I am not convinced by the argument which follows (see Cowen’s Third Law), but I am committed to passing new ideas along, and the researchers — Liu, Mian, and Sufi — have a strong track record. Here goes:
A unique prediction of the model is that the value of industry leaders increases more than the value of industry followers in response to a decline in the interest rate, and, importantly, the magnitude of the relative increase in value of the leaders versus followers when the interest rate declines is larger at a lower initial level of the interest rate.
The model’s prediction is confirmed in the data.
The model provides a unified explanation for why the decline in long-term interest rates has been associated with rising market concentration, reduced dynamism, a widening productivity gap between leaders and followers, and slower productivity growth.
For further background, see also Alex’s earlier post about population/labor force decline and economic stagnation. It is easier for me to believe that their real interest rate effect is working through the propagation mechanism of population and labor force participation. Furthermore, I have read too many papers which seem to imply that real interest rates do not much, within normal limits, have a big effect on firm investment decisions. Their model would seem to imply the opposite, and I would like them to test their implied elasticity against the actual elasticities other researchers have measured.