Markups, Productivity and the Financial Capability of Firms

34 Pages Posted: 25 May 2017 Last revised: 21 Dec 2017

See all articles by Carlo Altomonte

Carlo Altomonte

Bocconi University - Department of Policy Analysis and Public Management

Domenico Favoino

Tinbergen Institute

Tommaso Sonno

University of Bologna; London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP)

Date Written: May 1, 2017

Abstract

We extend a framework of monopolistically competitive firms heterogeneous in productivity and with endogenous markups (as in Melitz and Ottaviano, 2008) to incorporate the presence of financial frictions. Before producing, firms need to obtain a loan necessary to cover part of production costs, for which they have to pledge collateral in the form of tangible assets. In addition to productivity, firms are also heterogeneous in their financial capability: some firms have access to collateral at lower costs. As a result, financial capability and collateral requirements enter together with productivity in the expression of the equilibrium firm-level markup. At the aggregate level, the model shows that tighter credit constraints in the form of higher collateral requirements mitigate the pro-competitive effect of trade. We validate our theoretical results capitalizing on a representative sample of manufacturing firms surveyed across a subset of European countries during the financial crisis. Guided by theory, we estimate for each firm financial capability, TFP and markups. We then employ those estimates to structurally retrieve from the model a firm-specific measure of collateral requirements (a proxy of credit constraint), and test our main propositions.

Keywords: credit constraints, heterogeneous firms, markups, international trade

JEL Classification: F10, F14, G32

Suggested Citation

Altomonte, Carlo and Favoino, Domenico and Sonno, Tommaso, Markups, Productivity and the Financial Capability of Firms (May 1, 2017). BAFFI CAREFIN Centre Research Paper No. 2017-55, Available at SSRN: https://ssrn.com/abstract=2973195 or http://dx.doi.org/10.2139/ssrn.2973195

Carlo Altomonte (Contact Author)

Bocconi University - Department of Policy Analysis and Public Management ( email )

Via Roentgen 1
Milan, 20136
Italy

Domenico Favoino

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Tommaso Sonno

University of Bologna ( email )

Bologna
Italy

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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