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 product quality and quantity, and what drives heterogeneity in quality choice? I show that wage heterogeneity in the presence of time opportunity cost of consumption leads to endogenous heterogeneity in the desire for quality, creates a motive for vertical differentiation, and breaks the quality-quantity equivalence embedded in many macroeconomic and industrial organization models. The optimal choice rule states that consumers select the good that provides the highest ratio of quality to cost--where cost includes the price of the good and individual specific opportunity cost of time. Consumers with identical preferences select different quality levels due to heterogeneity in the opportunity cost of their time. By considering the set of goods that will selected by an agent of some wage, an increasing, convex price-quality curve emerges for any collection of goods and prices. Total income (including non-wage) drives quantity choice. The model exhibits a ``Quantity Neutrality'' property that allows the quantity selection sub-problem to be restated as a traditional consumer’s problem. This perspective offers novel insights into the determinants of heterogeneity in quality selection, with implications on labor supply and retirement decisions.
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.
Monopolistic Competition in the tradition of Robinson [1933] and Chamberlin [1933] allows for rich economic behavior, including endogenously varying markups. This paper aims to extend models of Monopolistic Competition in a direction useful for macroeconomic applications. I characterize the model under three different equilibrium concepts: (i) long-run general equilibrium (ie, with a free entry condition), (ii) short-run general equilibrium (without a free entry condition), and (iii) short-run partial equilibrium (without labor market clearing). In each setting, I derive sufficient conditions for the existence and uniqueness of equilibria and characterize comparative statics. While the composition of firms is endogenous in the free-entry equilibrium, I provide sufficient conditions for the pro-competitive effects of entry in the short run. I also revisit the question of the behavior of markups over the business cycle and find that under the most reasonable specification, demand and supply shocks always move markups in the same direction as total output in the short run. This pattern, while at odds with canonic New Keynesian Models, is consistent with the empirical evidence presented by Nekarada and Ramey [2020].
Works In Progress:
The Iterative Normalized Gradient Method Addition Method (With Daniel Benjamin, Derek Lougee, Ori Heffetz, ,and Miles Kimball)
General Super Elasticities in Rank Invariant Utility Functions
Free Entry and Entry Costs over the Firm Life Cycle
The Precautionary Quotient (With Miles Kimball)