Markup Cycles, Dynamic Misallocation, and Amplification

49 Pages Posted: 11 Jul 2014

See all articles by Marcus M. Opp

Marcus M. Opp

Stockholm School of Economics - Department of Finance; Swedish House of Finance

Christine A. Parlour

University of California, Berkeley - Finance Group

Johan Walden

University of California, Berkeley - Finance Group

Date Written: July 9, 2014

Abstract

We develop a tractable dynamic general equilibrium model of oligopolistic competition with a continuum of heterogeneous industries. Industries are exposed to aggregate and industry-specific productivity shocks. Firms in each industry set value-maximizing state-contingent markups, taking as given the behavior of all other industries. When consumers are risk-averse, industry markups are countercyclical with regards to the industry-specific component, but may be procyclical with regards to the aggregate shock. The general equilibrium dispersion of markups implied by the optimization of heterogeneous industries creates misallocation of labor across industries. The misallocation, in turn, generates aggregate welfare losses state-by-state that feed back into the industry problem via a representative agent's marginal utility of aggregate consumption. Misallocation dynamics may transmit industry-specific shocks, or amplify small aggregate shocks, and so lead to aggregate fluctuations through these feedback effects.

Keywords: Oligopolistic Competition, Markup Cycles, Allocative Efficiency, Dynamic Games, DSGE Models

JEL Classification: L16, E32, L13

Suggested Citation

Opp, Marcus M. and Parlour, Christine A. and Walden, Johan, Markup Cycles, Dynamic Misallocation, and Amplification (July 9, 2014). Journal of Economic Theory, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2464320

Marcus M. Opp (Contact Author)

Stockholm School of Economics - Department of Finance ( email )

SE-113 83 Stockholm
Sweden

Swedish House of Finance

Drottninggatan 98
111 60 Stockholm
Sweden

Christine A. Parlour

University of California, Berkeley - Finance Group ( email )

Haas School of Business
545 Student Services Building
Berkeley, CA 94720
United States
510-643-9391 (Phone)

Johan Walden

University of California, Berkeley - Finance Group ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
(510) 643-0547 (Phone)

HOME PAGE: http://www.haas.berkeley.edu/faculty/walden.html

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