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When does a cost shock enhance productivity? Theory and evidence

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  • Zhou, Mohan
  • Wei, Xu
  • Xu, Huilan
  • Zhou, Yimin

Abstract

Rising input costs can make it difficult for businesses to remain competitive; however they can also force firms to innovate. This study investigates how cost shocks affect firm productivity and innovation. We build a model that considers that some firms are better at innovating than others. We found that when costs go up under certain conditions, it can increasingly incentivize capable firms to innovate and become more productive, but the opposite is true for less competent firms. Using Chinese firm-level data, we empirically test the validity of our model’s prediction and find strong support. Further examination underscores the moderating role of R&D in facilitating productivity growth when firms face oil price shocks.

Suggested Citation

  • Zhou, Mohan & Wei, Xu & Xu, Huilan & Zhou, Yimin, 2023. "When does a cost shock enhance productivity? Theory and evidence," Economic Modelling, Elsevier, vol. 128(C).
    • Handle: RePEc:eee:ecmode:v:128:y:2023:i:c:s0264999323003383
    DOI: 10.1016/j.econmod.2023.106526
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    References listed on IDEAS

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    1. Clément de Chaisemartin & Xavier D'Haultfœuille, 2020. "Two-Way Fixed Effects Estimators with Heterogeneous Treatment Effects," American Economic Review, American Economic Association, vol. 110(9), pages 2964-2996, September.
    2. Evgeny Zhelobodko & Sergey Kokovin & Mathieu Parenti & Jacques‐François Thisse, 2012. "Monopolistic Competition: Beyond the Constant Elasticity of Substitution," Econometrica, Econometric Society, vol. 80(6), pages 2765-2784, November.
    3. David Popp, 2002. "Induced Innovation and Energy Prices," American Economic Review, American Economic Association, vol. 92(1), pages 160-180, March.
    4. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
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    Cited by:

    1. Fontanari, Claudia, 2024. "The role of wages in triggering innovation and productivity: A dynamic exploration for European economies," Economic Modelling, Elsevier, vol. 130(C).

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    More about this item

    Keywords

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    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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