Markups and Productivity under Heterogeneous Financial Frictions

43 Pages Posted: 19 Dec 2018

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: December 2018

Abstract

We incorporate heterogeneous financial frictions in a setting of monopolistically competitive firms with endogenous markups. Before producing, firms must pledge collateral to obtain a bank loan, needed to cover part of production costs. Firms differ both in productivity and in their cost of raising collateral. Firm-specific financial frictions, together with productivity, therefore figure in the equilibrium expressions of prices and markups. We validate our theoretical results on a representative sample of European manufacturing firms surveyed during the financial crisis. Guided by our model we retrieve from balance-sheet data firm-specific measures of access to finance, total factor productivity and markups, and then use these variables to estimate our equilibrium equations structurally. Consistent with our model, we show how heterogeneity in access to finance explains part of the dispersion of prices and markups, even after controlling for firms' productivity and size. In the aggregate industry equilibrium, the amount of collateral required by banks significantly affects the cost pass-through to prices.

Keywords: Financial frictions, heterogeneous fi rms, markups

JEL Classification: D24; E22; F36; G20

Suggested Citation

Altomonte, Carlo and Favoino, Domenico and Sonno, Tommaso, Markups and Productivity under Heterogeneous Financial Frictions (December 2018). BAFFI CAREFIN Centre Research Paper No. 2018-100. Available at SSRN: https://ssrn.com/abstract=3303329 or http://dx.doi.org/10.2139/ssrn.3303329

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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
39
Abstract Views
247
PlumX Metrics