Firm-to-Firm Relationships and Price Rigidity Theory and Evidence

91 Pages Posted: 13 Jan 2017

See all articles by Sebastian Heise

Sebastian Heise

Federal Reserve Bank of New York

Date Written: November 2016

Abstract

Economists have long suspected that firm-to-firm relationships might increase price rigidity due to the use of explicit or implicit fixed-price contracts. Using transaction-level import data from the U.S. Census, I study the responsiveness of prices to exchange rate changes and show that prices are in fact substantially more responsive to these cost shocks in older versus newly formed relationships. Based on additional stylized facts about a relationship’s life cycle and interviews I conducted with purchasing managers, I develop a model in which a buyer-seller pair subject to persistent, stochastic shocks to production costs shares profit risk under limited commitment. Once structurally estimated, the model replicates the empirical correlation between relationship age and the responsiveness of prices to shocks. My results suggest that changes to the average length of relationships in the economy - e.g., in a recession, when the share of young relationships declines - can influence price exibility and hence the effectiveness of monetary policy.

Keywords: relationships, price rigidity, pass through

JEL Classification: E300, F100, F200

Suggested Citation

Heise, Sebastian, Firm-to-Firm Relationships and Price Rigidity Theory and Evidence (November 2016). Available at SSRN: https://ssrn.com/abstract=2898148 or http://dx.doi.org/10.2139/ssrn.2898148

Sebastian Heise (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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