Using Cost Minimization to Estimate Markups

66 Pages Posted: 4 Dec 2019

See all articles by Ulrich Doraszelski

Ulrich Doraszelski

University of Pennsylvania - The Wharton School

Jordi Jaumandreu

Boston University

Date Written: November 2019

Abstract

De Loecker & Warzynski's (2012) method for recovering markups from cost-minimization conditions and estimated input elasticities yields either larger or smaller markups for exporters than for non-exporters depending on the input (labor or materials) employed. We point out two difficulties. First, under imperfect competition, an Olley & Pakes (1996) style estimator for input elasticities has to account for markups. Second, with commonly used specifiĀcations of the production function, the cost-minimization conditions do not match the variation in the data. We discuss how to address these difficulties. According to our estimates, the markups of exporters and non-exporters are essentially the same.

Suggested Citation

Doraszelski, Ulrich and Jaumandreu, Jordi, Using Cost Minimization to Estimate Markups (November 2019). CEPR Discussion Paper No. DP14114, Available at SSRN: https://ssrn.com/abstract=3496603

Ulrich Doraszelski (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Jordi Jaumandreu

Boston University ( email )

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