Markups and Productivity under Heterogeneous Financial Frictions

Carlo Altomonte (), Domenico Favoino and Tommaso Sonno

No 18100, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: We incorporate heterogeneous financial frictions in a setting of monopolistically competitive firms with endogenous markups. Before producing, firms must pledge collateral to obtain a bank loan, needed to cover part of production costs. Firms differ both in productivity and in their cost of raising collateral. Firm-specic financial frictions, together with productivity, therefore figure in the equilibrium expressions of prices and markups. We validate our theoretical results on a representative sample of European manufacturing firms surveyed during the financial crisis. Guided by our model we retrieve from balance-sheet data firm-specic measures of access to finance, total factor productivity and markups, and then use these variables to estimate our equilibrium equations structurally. Consistent with our model, we show how heterogeneity in access to finance explains part of the dispersion of prices and markups, even after controlling for firms' productivity and size. In the aggregate industry equilibrium, the amount of collateral required by banks significantly affects the cost pass-through to prices.

Keywords: Financial frictions; heterogeneous firms; markups (search for similar items in EconPapers)
JEL-codes: D24 E22 F36 G20 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2018
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-eff and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://repec.unibocconi.it/baffic/baf/papers/cbafwp18100.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:baf:cbafwp:cbafwp18100

Access Statistics for this paper

More papers in BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy Via Röntgen, 1 - 20136 Milano - Italy. Contact information at EDIRC.
Bibliographic data for series maintained by Michela Pozzi ().