IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Heterogeneous Mark-Ups and Endogenous Misallocation

  • Michael Peters

    (Massachusetts Institute of Technology)

Registered author(s):

    Why are resources misallocated across firms? I study an economy where misallocation stems from firms charging heterogeneous mark-ups. The distribution of mark-ups affects both aggregate TFP as well as equilibrium factor prices. While TFP is solely affected by the cross-sectional dispersion of mark-ups, factor prices depend only on the average mark-up. Mark-ups however are the result of firms' pricing decision and hence endogenous. In my model, they are determined by the process of entry and exit. If entry is more intense, aggregate TFP and factor prices are high, as product market competition reduces both the level and the dispersion of mark-ups. The static degree of misallocation is therefore closely linked to the dynamic evolution of the economy. I test the model's prediction using regional variation in the extent of entry into the manufacturing sector in Indonesia. I show that regional differences in the entry rate are negatively correlated with the average mark-up and the mark-up dispersion as the model predicts. In terms of welfare, the theory implies that the observed differences in mark-ups between high and low entry regions in Indonesia translate into TFP differences of 2.5%, differences in the steady state level of capital of 13% and differences in aggregate consumption of 6%.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: https://economicdynamics.org/meetpapers/2011/paper_78.pdf
    Download Restriction: no

    Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 78.

    as
    in new window

    Length:
    Date of creation: 2011
    Date of revision:
    Handle: RePEc:red:sed011:78
    Contact details of provider: Postal:
    Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

    Web page: http://www.EconomicDynamics.org/
    Email:


    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Ricardo Lagos, 2006. "A model of TFP," Staff Report 345, Federal Reserve Bank of Minneapolis.
    2. Peter Klenow & Andrés Rodríguez-Clare, 1997. "The Neoclassical Revival in Growth Economics: Has It Gone Too Far?," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 73-114 National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:red:sed011:78. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.