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Income Fluctuations and Firm Choice

Author

Listed:
  • Baker, Scott R.
  • Baugh, Brian
  • Kueng, Lorenz

Abstract

How households shift spending across firms in response to income fluctuations is an important source of firm risk. Using transaction-level data, we study how households interact with the universe of retailers following income changes. We find that income increases within and across households result in substitution toward retailers in a category that are higher quality; smaller; more profitable; and have higher labor intensity, research and development (R&D) intensity, and equity betas. Although not all shifts are economically large, they do not average out across retailers. Thus, retailer choice has implications for key financial and macroeconomic outcomes, such as aggregate profitability and labor demand.

Suggested Citation

  • Baker, Scott R. & Baugh, Brian & Kueng, Lorenz, 2021. "Income Fluctuations and Firm Choice," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 56(6), pages 2208-2236, September.
    • Handle: RePEc:cup:jfinqa:v:56:y:2021:i:6:p:2208-2236_11
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    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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