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Firm-to-Firm Relationships and Price Rigidity Theory and Evidence

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  • Sebastian Heise

Abstract

Economists have long suspected that firm-to-firm relationships might increase price rigidity due to the use of explicit or implicit fixed-price contracts. Using transaction-level import data from the U.S. Census, I study the responsiveness of prices to exchange rate changes and show that prices are in fact substantially more responsive to these cost shocks in older versus newly formed relationships. Based on additional stylized facts about a relationship's life cycle and interviews I conducted with purchasing managers, I develop a model in which a buyer-seller pair subject to persistent, stochastic shocks to production costs shares profit risk under limited commitment. Once structurally estimated, the model replicates the empirical correlation between relationship age and the responsiveness of prices to shocks. My results suggest that changes to the average length of relationships in the economy - e.g., in a recession, when the share of young relationships declines - can influence price flexibility and hence the effectiveness of monetary policy.

Suggested Citation

  • Sebastian Heise, 2017. "Firm-to-Firm Relationships and Price Rigidity Theory and Evidence," Working Papers 17-33, Center for Economic Studies, U.S. Census Bureau.
  • Handle: RePEc:cen:wpaper:17-33
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    File URL: https://www2.census.gov/ces/wp/2017/CES-WP-17-33.pdf
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    References listed on IDEAS

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    Cited by:

    1. repec:fip:fedkmb:00055 is not listed on IDEAS
    2. Krolikowski, Pawel & McCallum, Andrew H., 2016. "Goods-Market Frictions and International Trade," Working Paper 1635, Federal Reserve Bank of Cleveland.
    3. Tim Schmidt-Eisenlohr & Ryan Monarch, 2015. "Learning and the Value of Relationships in International Trade," 2015 Meeting Papers 668, Society for Economic Dynamics.
    4. Tim Schmidt-Eisenlohr & Ryan Monarch, 2015. "Learning and the Value of Relationships in International Trade," 2015 Meeting Papers 668, Society for Economic Dynamics.

    More about this item

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • F10 - International Economics - - Trade - - - General
    • F20 - International Economics - - International Factor Movements and International Business - - - General

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