The Production Approach to Markup Estimation Often Measures Input Distortions

15 Pages Posted: 5 Oct 2021 Last revised: 17 Jun 2022

See all articles by Arshia Hashemi

Arshia Hashemi

Cornerstone Research, Inc.

Ivan Kirov

University of Chicago - Department of Economics; Analysis Group, Inc.

James Traina

Federal Reserve Bank of San Francisco

Date Written: June 16, 2022

Abstract

The production approach recovers markups using the output elasticity for a variable and undistorted input. We show using the revenue elasticity for a variable input recovers that input's wedge. Our result has two implications. First, in the canonical setting with CES demand and monopolistic competition, past research using the production approach with revenue data should be recast as evidence of input, rather than output, distortions. Second, future research can use the production approach with revenue data to study input distortions, provided researchers can measure inputs in physical units. A promising application pertains to labor market distortions.

Keywords: Markups, Input Distortions, Output Elasticity, Revenue Elasticity

JEL Classification: D24, D40, L11, L16

Suggested Citation

Hashemi, Arshia and Kirov, Ivan and Traina, James, The Production Approach to Markup Estimation Often Measures Input Distortions (June 16, 2022). Available at SSRN: https://ssrn.com/abstract=3934534 or http://dx.doi.org/10.2139/ssrn.3934534

Arshia Hashemi (Contact Author)

Cornerstone Research, Inc. ( email )

555 West 5th Street 38th Floor
Los Angeles, CA 90013
United States

HOME PAGE: http://www.cornerstone.com/professionals/arshia-hashemi/

Ivan Kirov

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States

Analysis Group, Inc. ( email )

111 Huntington Avenue
10th floor
Boston, MA 02199
United States

James Traina

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

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