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Profit Margins, Adjustment Costs and the Business Cycle: An Application to Spanish Manufacturing Firms

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  • Jose C. Farinas

    (Universidad Complutense de Madrid)

  • Elena Huergo

    (Universidad Complutense de Madrid)

Abstract

The objective of this paper is to investigate the cyclical behaviour of markups, using a panel of Spanish manufacturing firms over the period 1990--1998. Margins are estimated from the optimal conditions derived from the firm"s optimisation problem, which assumes that labour inputs are subject to adjustment costs. A number of results emerge from the estimations. First, we find positive and asymmetric adjustment costs for permanent labour inputs. Second, price--cost margins are markedly procyclical. Our estimates suggest that labour adjustment costs more than double the variability of average margins with respect to Lerner indexes. Third, we find differences in the parameters of the adjustment technology across industries which make markups of intermediate and production good industries more cyclical than consumer good industries. Finally, industry--specific price--cost margins are higher in more concentrated industries. Copyright Blackwell Publishing Ltd, 2003.

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Bibliographic Info

Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics and Statistics.

Volume (Year): 65 (2003)
Issue (Month): 1 (February)
Pages: 49-72

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Handle: RePEc:bla:obuest:v:65:y:2003:i:1:p:49-72

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Cited by:
  1. Lourdes Moreno Martín & Diego Rodríguez Rodríguez, . "Domestic and Foreign Price-Marginal Cost Margins: An Application to Spain Manufacturing Firms," Working Papers on International Economics and Finance 00-03, FEDEA.
  2. Laurent Maurin & Moreno Roma & Igor Vetlov, 2011. "Profit Dynamics across the Largest Euro Area countries and Sectors," Bank of Lithuania Working Paper Series 12, Bank of Lithuania.
  3. Manjon, M.C., 2004. "Econometric Modelling in Blockholder Systems of Corporate Governance," Discussion Paper 2004-74, Tilburg University, Center for Economic Research.
  4. Jan Askildsen & Øivind Nilsen, 2010. "Markup cyclicality and input factor adjustments," Empirical Economics, Springer, vol. 38(2), pages 409-428, April.
  5. Jacques-Bernard Sauner-Leroy, 2003. "The impact of the implementation of the Single Market Programme on productive efficiency and on mark-ups in the European Union manufacturing industry," European Economy - Economic Papers 192, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  6. Ángel Estrada & David López-Salido, 2005. "Sectoral mark-up dynamics in Spain," Banco de Espa�a Working Papers 0503, Banco de Espa�a.
  7. Andrea Vaona, 2010. "A nonparametric panel data approach to the cyclical dynamics of price-cost margins," Kiel Working Papers 1580, Kiel Institute for the World Economy.

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