Convex Supply Curves

87 Pages Posted: 9 Mar 2020

See all articles by Christoph Boehm

Christoph Boehm

University of Texas at Austin

Nitya Pandalai-Nayar

University of Texas at Austin - Department of Economics

Date Written: March 2020

Abstract

We provide evidence that industries' supply curves are convex. To guide our empirical analysis, we develop a putty-clay model in which capacity constraints at the plant level generate convex supply curves at the industry level. The model's key insight is that an industry's capacity utilization rate is a sufficient statistic for the slope of its supply curve. Using data on capacity utilization and three different instruments, we estimate the supply curve and find robust evidence for convexity. Supply curves are essentially flat at low levels of capacity utilization but increasing at higher levels. Further, industries with low initial capacity utilization rates expand production twice as much after demand shocks as industries that produce close to their capacity limit. The nonlinearity we identify has a number of macroeconomic implications, including that responses to shocks are state-dependent, that the Phillips curve is convex, and that the welfare costs of business cycles are larger than in Lucas (1987).

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Suggested Citation

Boehm, Christoph and Pandalai-Nayar, Nitya, Convex Supply Curves (March 2020). NBER Working Paper No. w26829, Available at SSRN: https://ssrn.com/abstract=3550978

Christoph Boehm (Contact Author)

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Nitya Pandalai-Nayar

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
3
Abstract Views
85
PlumX Metrics