Entry and Profits in an Aging Economy: The Role of Consumer Inertia

Gideon Bornstein
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Gideon Bornstein: Northwestern University

No 309, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: Over the past thirty years, the share of young firms in the US has declined while the share of profits in GDP has increased. This paper explores the role of consumer inertia—persistence in households’ consumption choices—as a driver of these twin phenomena. The hypothesis is that more consumer inertia makes it more difficult for entrants to establish a customer base and incentivizes large incumbents to raise markups. First, I use detailed micro data to document that consumer inertia has increased over time due to the aging of the US population. Second, I show that there is a negative relation between consumer inertia and firm formation using empirical evidence across product categories and across US states. Finally, I develop a model of entry, exit, and firm dynamics with consumer inertia. I calibrate the model using my micro estimates of consumer inertia and data on firm dynamics. According to the model, the rise in consumer inertia accounts for a substantial proportion of the twin phenomena.

Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:309

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