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Customer capital and the business cycle

Author

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  • Leena Rudanko

    (Boston University)

  • Francois Gourio

    (Boston University)

Abstract

Firms spend substantial resources on creating and maintaining customer relationships. We explore the role of this customer capital for firm level and aggregate dynamics. Building on the neoclassical adjustment cost model of investment, we propose a tractable search theoretic general equilibrium model of long-term customer relationships. Frictional product markets require firms to spend resources on sales efforts, and cause existing customers to be partially locked-in. Our model implies that in more frictional product markets, where firms selling expenses are higher, measured profit rates, Tobin’s Q and markups are higher. Sales and investment are less volatile and exhibit hump-shaped responses to shocks. As a result, the model also reproduces the well-documented failure of investment-Q regressions. We document that these patterns are present in Compustat data.

Suggested Citation

  • Leena Rudanko & Francois Gourio, 2011. "Customer capital and the business cycle," 2011 Meeting Papers 120, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:120
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    References listed on IDEAS

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    Cited by:

    1. Allen Tran, 2013. "Customer Driven Establishment Dynamics and Allocative Efficiency," 2013 Meeting Papers 115, Society for Economic Dynamics.

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