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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 exibility and hence the effectiveness of monetary policy.

Suggested Citation

  • Sebastian Heise, 2016. "Firm-to-Firm Relationships and Price Rigidity - Theory and Evidence," CESifo Working Paper Series 6226, CESifo.
  • Handle: RePEc:ces:ceswps:_6226
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    References listed on IDEAS

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    Cited by:

    1. Fariha Kamal & Ryan Monarch, 2018. "Identifying foreign suppliers in U.S. import data," Review of International Economics, Wiley Blackwell, vol. 26(1), pages 117-139, February.
    2. Tim Schmidt-Eisenlohr & Ryan Monarch, 2015. "Learning and the Value of Relationships in International Trade," 2015 Meeting Papers 668, Society for Economic Dynamics.
    3. Alan Finkelstein Shapiro & Andres Gonzalez Gomez & Jessica Roldan-Pena & Victoria Nuguer, 2018. "Price Dynamics and the Financing Structure of Firms in Emerging Economies," 2018 Meeting Papers 339, Society for Economic Dynamics.
    4. Fariha Kamal & Ryan Monarch, 2018. "Identifying foreign suppliers in U.S. import data," Review of International Economics, Wiley Blackwell, vol. 26(1), pages 117-139, February.
    5. George A. Kahn & Nicholas Sly, 2017. "Subsiding Headwinds from the Strong Dollar: Evidence from Producer Prices along the Supply Chain," Macro Bulletin, Federal Reserve Bank of Kansas City, pages 1-6, July.

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    More about this item

    Keywords

    relationships; price rigidity; pass through;

    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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