Heterogeneous Mark-Ups and Endogenous Misallocation
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%.
|Date of creation:||2011|
|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/
More information through EDIRC
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.:
- Ricardo Lagos, 2006.
"A model of TFP,"
345, Federal Reserve Bank of Minneapolis.
- 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.
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 references are entirely missing, you can add them using this form.