Research Interests:
Macroeconomics, Industrial Organization, Economic Growth and Innovation, Microeconomic theory
Working Papers:
Among the ways to measure market power, special attention has always been given to the wedge between marginal cost and price: the markup. This paper investigates the validity of firm-level markup estimation techniques, focusing on the cost accounting (CA) approach—a straightforward, transparent, and data-thrifty alternative that, despite its origins in early industrial organization literature, has seen little modern application. While the production function (PF) approach has quickly become the workhorse method in macroeconomic applications, several high-profile criticisms have brought its validity into question. My findings show that the rise in U.S. markups is robust to CA, suggesting that the trend is not driven by PF’s biases. In fact, variation in PF estimates is driven almost entirely by variation in its ‘accounting component,’ rather than its ‘production function component,’ which contains the well-known biases. For validation, I develop a novel test based on Dorfman-Steiner's (1954) advertising equation, concluding that the cost accounting approach has a higher signal-to-noise ratio, while both measures retain some signal of underlying markups. The data-thrifty nature of CA makes it feasible for a broader range of applications. To highlight this, I conclude with several examples that play into CA’s strengths. Collectively, these results suggest that practitioners can confidently implement CA in some cases.
Quality vs. Quantity When Time is Scarce
Abstract:
How do consumers decide between quality and quantity, and what drives heterogeneity in quality choice? This paper develops a tractable model of vertical differentiation in which quality choice emerges endogenously from wage heterogeneity in the presence of time opportunity costs of consumption. The model predicts that higher-wage consumers choose higher quality while higher-wealth consumers choose higher quantity. This breaks the standard equivalence between quality and quantity and offers a tractable alternative to discrete choice models, explicitly incorporating both a quantity and a quality dimension. This perspective offers novel insights for applied work in labor economics, industrial organization, and macroeconomics.
How are markups linked to growth and entry rates? This paper demonstrates how an endogenous growth model micro-founded in monopolistic competition can produce rich predictions about the dynamics of productivity growth, entry, and markups driven by the preferences for quantity and variety. With non-homothetic, non seperable preferences markups react to changes in real income and changes in the number of competing firms. Larger markups incentivize entry and divert research effort away from productivity innovation. Equilibrium markups then arise from a no-arbitrage condition between research sectors. A balanced growth path arises whenever the price elasticity of demand effects of quantity growth and variety growth move in opposite directions, and equilibrium markups are globally stable so long as the quantity effect decreases prices sensitivity, and the variety effect increases price sensitivity. This produces predictions consistent with several recent macroeconomic trends, such as declining research productivity, declining growth rates, declining entry rates, and a rise in markups.
I provide a unified framework for analyzing variable markups under monopolistic competition, allowing for heterogeneous firms, arbitrary demand, general production technologies, and endogenous labor supply. I analyze the model under multiple equilibrium concepts and derive general sufficient conditions for existence and uniqueness in each. Uniqueness under one equilibrium concept disciplines comparative statics in another, which can be fully characterized in terms of interpretable elasticities. This includes a necessary and sufficient condition for a pro-competitive effect of entry in a highly general setting. In each setting, comparative statics admit a graphical representation directly analogous to the classic supply and demand diagram. In the short run, the model predicts that markups move pro-cyclically in response to both supply and demand shocks—contradicting standard New Keynesian models but consistent with recent empirical evidence.
Works In Progress:
On the Limits to Elasticity of Substitution with Symmetry
The Iterative Normalized Gradient Method Addition Method (With Daniel Benjamin, Derek Lougee, Ori Heffetz, and Miles Kimball)
The Precautionary Quotient (With Miles Kimball)
Estimating Production Functions from Revenue Data: A New Approach (With Qingsong Pan and Lixue Zhou)