Pricing Decisions under Financial Frictions: Evidence from the WDN Survey

50 Pages Posted: 14 Jul 2017

Date Written: July 12, 2017

Abstract

I test the predictions from Duca, Montero, Riggi and Zizza (2017), who develop a customer-market model with consumer switching costs and capital-market imperfections in which price-cost markups behave countercyclically, with a subsample of European firms participating in the Wage Dynamics Network 2014 survey. I use a novel empirical approach developed by Aakvik, Heckman and Vytlacil (2005) for estimating discrete choice models with binary endogenous regressors that allows for selection on unobservables. Results show that firms subject to financial constraints had a significantly higher probability of raising markups than in a counterfactual scenario without such constraints. Moreover, the estimated partial effects for the main variables are in overall accordance with the predictions from the theoretical model.

Keywords: Markups, Financial Frictions, Customer Market, Discrete-Choice Models

JEL Classification: C25, C26, D22, L11

Suggested Citation

Montero, Jose Manuel, Pricing Decisions under Financial Frictions: Evidence from the WDN Survey (July 12, 2017). Banco de Espana Working Paper No. 1724, Available at SSRN: https://ssrn.com/abstract=3000845 or http://dx.doi.org/10.2139/ssrn.3000845

Jose Manuel Montero (Contact Author)

Banco de España ( email )

Madrid 28014
Spain

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