Convex Supply Curves

Christoph Boehm and Nitya Pandalai-Nayar

No 26829, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We provide evidence that industries' supply curves are convex. To guide our empirical analysis, we develop a putty-clay model in which capacity constraints at the plant level generate convex supply curves at the industry level. The model's key insight is that an industry's capacity utilization rate is a sufficient statistic for the slope of its supply curve. Using data on capacity utilization and three different instruments, we estimate the supply curve and find robust evidence for convexity. Supply curves are essentially flat at low levels of capacity utilization but increasing at higher levels. Further, industries with low initial capacity utilization rates expand production twice as much after demand shocks as industries that produce close to their capacity limit. The nonlinearity we identify has a number of macroeconomic implications, including that responses to shocks are state-dependent, that the Phillips curve is convex, and that the welfare costs of business cycles are larger than in Lucas (1987).

JEL-codes: E22 E32 E52 E62 F44 (search for similar items in EconPapers)
Date: 2020-03
New Economics Papers: this item is included in nep-mac
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Published as Christoph E. Boehm & Nitya Pandalai-Nayar, 2022. "Convex Supply Curves," American Economic Review, American Economic Association, vol. 112(12), pages 3941-3969, December.
Published as Christoph E. Boehm & Nitya Pandalai-Nayar, 2022. "Convex Supply Curves," American Economic Review, vol 112(12), pages 3941-3969.

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Journal Article: Convex Supply Curves (2022)
Working Paper: Convex supply curves (2020)
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