When does a cost shock enhance productivity? Theory and evidence

Mohan Zhou, Xu Wei, Huilan Xu and Yimin Zhou

Economic Modelling, 2023, vol. 128, issue C

Abstract: Rising input costs can make it difficult for businesses to remain competitive; however they can also force firms to innovate. This study investigates how cost shocks affect firm productivity and innovation. We build a model that considers that some firms are better at innovating than others. We found that when costs go up under certain conditions, it can increasingly incentivize capable firms to innovate and become more productive, but the opposite is true for less competent firms. Using Chinese firm-level data, we empirically test the validity of our model’s prediction and find strong support. Further examination underscores the moderating role of R&D in facilitating productivity growth when firms face oil price shocks.

Keywords: Heterogeneous firms; Oil price shocks; Innovation; Productivity (search for similar items in EconPapers)
JEL-codes: D21 L11 L25 Q40 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:128:y:2023:i:c:s0264999323003383

DOI: 10.1016/j.econmod.2023.106526

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