Under perfect competition, productivity growth leads firms to expand production and demand more inputs. If firms have market power, I prove that this is not always the case. At high levels of markups, firms may reduce their input demand when they become more productive. This decoupling of input demand from productivity growth is driven by the incomplete pass-through of productivity to output. I characterize the theoretical conditions that lead to this result in terms of the shape of output demand and market structure. Many widely-used demand functions meet these conditions in workhorse models of monopolistic and oligopolistic competition. I also discuss under what circumstances this decoupling can be detected in the data. In an empirical illustration based on Chinese manufacturing firms, I find patterns consistent with this result in many narrowly-defined industries.
Keywords: productivity, derived factor demand, firm-level markups, incomplete pass-through.
Presented at: 22nd CEPR/JIE Conference on Applied Industrial Organization, EEA-ESEM Congress 2022, Annual Conference of the European Association for Research in Industrial Economics (EARIE 2022), Annual conference of the European Trade Study Group (ETSG 2022), UZH workshop on Imperfect Competition in Macroeconomics.
Resource allocation with markups and policy distortions: is the covariance always informative?
The covariance between firm productivity and size is commonly used to analyze how the allocation of resources evolves within an industry in the aftermath of a policy change. Following Olley and Pakes (1996), increases in this measure have been interpreted as a sign of improved allocative efficiency. In this paper, I verify the validity of this interpretation in a model of monopolistic competition with horizontal product differentiation, free-entry, and variable markups. In such a context, I find that the effects of various welfare-enhancing interventions do not always map into a higher covariance term. Moreover, by comparing the welfare gap between the market equilibria and the social optimum before and after these policy changes, I show that the covariance may not be an informative measure of allocative efficiency.
Keywords: allocative efficiency; firm productivity; market power; resource misallocation.
Presented at: RES 2021 Annual Conference, III International Workshop on Market Studies and Spatial Economics, Spring Meeting of Young Economists 2021, Annual Conference of the European Association for Research in Industrial Economics (EARIE 2021), European Summer Meetings of the Econometric Society (ESEM 2021), Research in International Economics and Finance (RIEF) 2021 conference, Annual conference of the European Trade Study Group (ETSG 2021), 2021 Annual CompNet Conference at the Banque de France, 2021 Comparative Analysis of Enterprise Data (CAED) Conference.
We study the changing patterns of business dynamism in Europe using representative and comparable micro-aggregated data from 19 European countries. We document a widespread reduction in job reallocation rates in Europe, accompanied by a decline in the number and the share of activity of young firms. This decline concerns all economic sectors and appears to be driven mainly by within-sector dynamics, rather than cross-sectoral reallocations. This is consistent with existing evidence in the US (Decker, Haltiwanger, Jarmin, & Miranda, 2020). However, we rationalize this decline with a firm-level framework relating the responsiveness of employment to productivity to changes in market power and technology, rather than adjustment costs.
Keywords: Business Dynamism, Productivity, Responsiveness of labor demand, Market power, European cross-country data.
Presented at: 24th International Network for Economic Research (INFER) Annual conference, European Summer Meetings of the Econometric Society (ESEM 2022), Annual Conference of the European Association for Research in Industrial Economics (EARIE 2022).
WORK IN PROGRESS
Pass-Through in Networks: the case of Air Passenger Taxes with W. H. Burton (KUL)