JOB MARKET PAPER[Full Text] [SSRN]
Media: Marginal Revolution
I examine the relationship between customer income and firm markups using rich data on household transactions and wholesale costs. Over the observed purchases, high-income households pay 15pp higher retail markups than low-income households. Half of the markup gap is due to differences in markups paid at the same store. Conditional on income, markups paid by a household also increase when a household shops in high-income areas, shops at retail chains with locations in other high-income areas, or purchases products with a high-income customer base. A model in which household search intensity depends on opportunity cost of time can account for these facts. Consistent with the model’s predictions, I document that retail markups across cities rise with both per-capita income and inequality. Through the lens of the model, changes in the income distribution since 1950 account for a 10–14pp rise in retail markups, with 30 percent of the increase since 1980 due to growing income dispersion. This rise in markups consists of within-firm markup increases as well as a reallocation of sales to high-markup firms, which occurs without any change to the nature of firm production or competition.
[Full Text] [SSRN]
Empirical studies of commodity cost pass-through typically find that pass-through is incomplete: even at long horizons, a 10 percent increase in costs causes retail prices to rise less than 10 percent. Using microdata from gasoline and food products, I find that incomplete pass-through in percentages often disguises complete pass-through in levels: a $1/unit increase in commodity costs leads to $1/unit higher retail prices. Pass-through appears incomplete in percentages due to an additive margin between marginal costs and prices. A model in which firms seek to bound the risk of variable profits falling short of overhead costs can account for this pricing behavior. In contrast to the workhorse model, this model also predicts dynamics of industry gross margins and entry consistent with the data. An implication of complete pass-through in levels is that rising commodity costs lead to higher inflation rates for low-margin products in a category, though absolute price changes are similar across products. This generates cyclical inflation inequality. I find that food-at-home inflation for the lowest income quintile is 10 percent more sensitive to upstream commodity costs. From 2020–2023, unequal commodity cost pass-through is responsible for two-thirds of the gap in food-at-home inflation rates experienced by low- and high-income households.
with Namrata Narain
[Full Text] [SSRN] [VoxEU Summary]
Media: Wall Street Journal, Financial Times, Bloomberg, Brookings, Marketwatch, Bloomberg Opinion, Semafor, Investopedia
We document a shift in the market impact of the press conference given by the Federal Reserve Chair at the close of FOMC meetings. Using intraday trading data, we find that market volatility is more than three times higher during press conferences given by current Chair Jerome Powell than during press conferences by predecessors Janet Yellen and Ben Bernanke. Press conferences since the start of Covid-19 are largely responsible for the heightened market volatility during Chair Powell's conferences. During this period, we find that the market tends to move in the opposite direction during the press conferences compared to its movement following the FOMC statement publication. In contrast, press conferences by Chairs Bernanke and Yellen tended to reinforce the market's initial reaction to the information released in the FOMC statement. Text analysis of the Q&A portions of Powell’s press conferences suggests that his choice of language correlates with these market movements. We find that Fed communications during the recent period have been less effective in reducing forward-looking interest rate uncertainty.
with David Rezza Baqaee and Emmanuel Farhi
The Review of Economic Studies, forthcoming
[Full Text] [NBER] [VoxEU Summary] [Code for Evaluating Demand System] [Replication Code]
How does an increase in market size, say due to globalization, affect welfare? We study this question using a model with monopolistic competition, heterogeneous markups, and fixed costs. We characterize changes in welfare and decompose changes in allocative efficiency into three different effects: (1) reallocations across firms with heterogeneous price elasticities due to intensifying competition, (2) reallocations due to the exit of marginally profitable firms, and (3) reallocations due to changes in firms’ markups. Whereas the second and third effects have ambiguous implications for welfare, the first effect, which we call the Darwinian effect, always increases welfare regardless of the shape of demand curves. We non-parametrically calibrate demand curves with data from Belgian manufacturing firms and quantify our results. We find that mild increasing returns at the micro level can catalyze large increasing returns at the macro level. Between 70–90% of increasing returns to scale come from improvements in how a larger market allocates resources. The lion’s share of these gains are due to the Darwinian effect, which increases the aggregate markup and concentrates sales and employment in high-markup firms. This has implications for policy: an entry subsidy, which harnesses Darwinian reallocations, can improve welfare even when there is more entry than in the first-best.
with David Rezza Baqaee and Emmanuel Farhi
Journal of Political Economy, forthcoming
[Full Text] [NBER] [VoxEU Summary]
We propose a supply-side channel for the transmission of monetary policy. We show that in an economy with heterogeneous firms and endogenous markups, demand shocks such as monetary shocks have a first-order effect on aggregate productivity. If high-markup firms have lower pass-throughs than low-markup firms, as is consistent with empirical evidence, then a monetary easing reallocates resources to high-markup firms and alleviates misallocation. Consequently, positive “demand shocks” are accompanied by endogenous positive “supply shocks” that raise output and productivity, lower inflation, and flatten the Phillips curve. We derive a tractable four-equation dynamic model and use it to show that monetary shocks generate a procyclical hump-shaped response in TFP and endogenous cost-push shocks in the New Keynesian Phillips curve. A calibration of our model suggests that the supply-side effect increases the half-life of a monetary shock’s effect on output by about 30% and amplifies the total impact on output by about 70%. Using identified monetary shocks, we provide empirical evidence for both the macro- and micro-level predictions of our model.
with Paul Brest, Shereen Griffith, Damira Khatam, Demoni Newman, Reirui Ri, Alessandra Santiago, Mengyi Xu, and Lucie Zikova
Impact investing often takes place in developing or frontier markets, and, as a result, impact investors will likely encounter problems unique to investing in countries where legal institutions are weak, ineffective, or entirely absent. The absence of credible legal institutions—and hence the lack of credible penalties for misbehavior—exposes the impact investor to a wider berth of actions from counterparties, as well as political and market uncertainties often present in these settings. This paper discusses the various risks and describes mitigation techniques.
[Full Text] [Stanford Digital Repository]
Rampant informality in developing economies proves to be a major obstacle to public revenue collection, limiting investment in crucial public infrastructure. The model presented in this paper sheds light on inter-firm mechanisms that motivate firms to either transact formally or transact informally and evade taxes. The formulation allows us to predict comparative statics on a variety of parameters, including the effective tax rate, the likelihood of audit, the penalties levered against firms caught transacting informally, and the distribution of firm sizes in the economy. Empirical support for each of these predictions is discussed. In particular, the model provides theoretical underpinnings for predicting the effect of multinational entry and trade liberalization on the size of the informal sector.