Internalizing the Social Costs of a Small Number of Powerful,Overindebted Firms

Extraordinary debt-to-capital ratios (leverage) and the compression of markets to very few, large companies (concentration) are economic risk factors. They have contributed to vast social costs during the current economic crisis in the USA and in Europe. This theoretical study internalizes these social costs via two market-based policy instruments for the first time in a real-economy Dixit–Stiglitz framework: a tax on firms' debt capital use and a subsidy for market entrants. It helps understand the complex real-economic mechanisms that these policy instruments cause, it derives intuitive rules of thumb for setting the tax rate and the subsidy level so that they elevate welfare, and it suggests ways to practically implement the policies.